The release of the April FOMC meeting left the markets in no doubt that June is very much a live meeting and that the probability of a rate hike is high. Policymakers generally judged that it might be justified to increase interest rates in June if economic data suggest growth were picking up in 2Q16. Specifically, policymakers need to see a pickup in the pace of economic growth and continued improvement in the labor market. In addition, they need to be confident that inflation will return to the target of two percent in the medium term.

Data (e.g. retail sales, CPI, IP growth) released since the meeting have been consistent with strong growth in Q2, and hence raise the risks for the move by the Fed in June. US retail sales rose 1.3 percent in April vs. 0.8 increase expected. U.S. consumer prices recorded their biggest increase in more than three years in April, pointing to a steady inflation build-up that could give the Fed ammunition to hike. U.S. manufacturing output rose 0.3 percent in April, a sign that the country’s manufacturing sector was resisting the downward pull from sputtering global growth.

“We still think a rate rise next month is, on balance, unlikely – particularly given the proximity of the next Fed meeting to the UK’s EU referendum. Nevertheless, with recent US data pointing to a pick-up in US inflation and a decent bounce in Q2 economic activity, a move cannot be ruled out.” said Lloyds Bank in a report.

The July contract for Fed Funds Futures slipped notably and now prices in a 34% likelihood of a June rate step. However, a full 25 bps hike is still not priced in by year-end, suggesting that upward pressure on yields could remain if the data co-operates. It is hardly surprising therefore that the dollar is appreciating so notably. USD/JPY trading at 109.41, while EUR/USD was at 1.1210 at around 1130 GMT.

This week’s US calendar is heavy in terms of speeches by FOMC members. The FOMC minutes from the April meeting revealed a divided committee, so markets will focus on any comments on when to expect the next hike. Today Bullard (voter, hawkish), Williams (non-voter, neutral) and Harket (non-voter, hawkish) are scheduled to speak. It is to note that June is the meeting where Janet Yellen will follow up with a press conference; so the stage is set for her to deliver an interest rate blow and then promise to respond with alacrity when the negative scenario appears.

“We would not be surprised by a policy change in June, but we are more inclined to look for a shift at the meeting in late July. With the evidence likely to leave the Fed in a grey area, and with officials planning to move gradually, we look for the next step in normalization to be a hawkish statement in June that sets the stage for a rate hike in July.” said Daiwa Capital Markets in a report.