BNY's John Velis notes that interest rate markets, a key driver for the US Dollar, still price roughly two Federal Reserve cuts this year despite hawkish-leaning minutes, sticky PCE inflation and weaker GDP. He highlights that a full 25 bp cut is only fully priced by July, while BNY Markets still expects three cuts in the second half.

OIS pricing resists hawkish data flow

"The market has barely budged from its view of two rate cuts this year, with the DEC26 Overnight Indexed Swap (OIS) implying around 60bp in looser policy."

"We note that one must look all the way out to the July meeting before a full cut is priced."

"This is not too far from where we stand, still expecting three 25bp cuts in the second half of the year due to weakening labor markets."

"The minutes had a slightly hawkish tone, not least because it was reported that “several” members indicated that they would have supported a two-sided description of the Committee’s future interest rate decisions, reflecting the possibility that upward adjustments to the target range for the federal funds rate could be appropriate if inflation remains at above-target levels."

"We believe that if our view on U.S. labor markets materializes later this year, even if inflation remains sticky, the Fed will move rates in line with the full-employment side of its mandate."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)