Derek Halpenny, European Head of GMR at MUFG, notes that the DXY index has now nearly fully retraced the sharp dollar decline last Thursday – the day following the FOMC meeting and Fed Chair Yellen’s press conference and the DXY index is higher for the fourth consecutive day. Key Quotes “While there remains a high degree of scepticism amongst market participants over positioning for a Fed rate hike after Yellen’s very dovish press conference, the more Fed officials stress that each FOMC meeting is “live” the more market price action suggests market participants are beginning to listen. Philadelphia Fed President Harker and Chicago Fed President Evans are the latest speakers (both non-voters this year) to give their views. Evans, a known dove indicated he is in line with the consensus on the FOMC – so has pitched for two rate increases (the DOTS show one below the median, perhaps Brainard?). Evans’ stance is not that surprising although some may have thought he was the lone DOT below the median. The real surprise came from the comments from President Harker who explicitly stated he wasn’t one of the median DOTS and basically stated that the FOMC should “get on with it”. So we have had quite a turnaround from Harker who on 16th February was arguing for caution due to the lack of evidence of rising inflation. While he said it was wise not to raise rates last week, he is now strongly arguing that due to employment and inflation data that every meeting is “live”. Harker would certainly appear to be in the camp of three rate increases this year. Part of President Harker’s optimism has been the fact that he has been “surprised by the strength of the US data”. Our sense is that this degree of surprise may well spread to a much wider portion of the FOMC. Yesterday, we had more evidence suggesting that the manufacturing sector is rebounding after the Richmond Fed Manufacturing index surged from -4.00 to +22.00 – the largest one-month gain since the data series began in 1993. Taken in isolation we should perhaps take the scale of improvement with a pinch of salt but nonetheless it follows stronger than expected readings for the ‘Philly Fed’ and Empire manufacturing series and the first back-to-back month-on-month gains in manufacturing production since March-April 2015. Clearly the drag on manufacturing is easing and that will only help improve the general tone of the economic data. Add to that the potential for consumer confidence to rebound in line with the equity market rebound and the positive picture from the data should be clear. We still do not expect the FOMC to act in April – Yellen’s sentiment is certainly more important than the sum of the Presidents who have spoken so far – but the tone of Fed rhetoric is such that it will not take much for the median DOTS to move back to three rate hikes this year, reinforcing our view that there remains scope for renewed dollar strength on the back of Fed action as we move into the second half of the year.” For more information, read our latest forex news.