The following article was written by Jasper Lawler, Senior Market Analyst at FCA regulated broker LCG.
Jasper Lawler
Wednesday sees the release of the minutes from the latest FOMC meeting and could serve as a reminder why the dollar is a good buy. Dollar bulls would needs much a reminder as the buck enters its fourth consecutive down day, amid a thawing of trade tensions and following President Trump bemoaning the Fed’s interest rate hikes. Trump voiced disappointment with Fed Chair Jerome Powel not being his cheap money Fed Chairman.
With the selloff in the dollar amplified, hawkish minutes from the Fed could see the unwinding of short term bets against the dollar. The minutes to be released on Wednesday at 18:00 GMT are from the FOMC meeting which concluded on 1st August. The central bank left interest rates unchanged as expected. In its hawkish statement the Fed gave an upbeat assessment of the US economy and confirmed that it was on course to continue gradually raising interest rates. Changes to the August FOMC statement language were minimal, just reflecting changes in economic data, indicating that we can expect the minutes to be broadly hawkish.
Still Looking at 4 Hikes
The Fed are broadly expected to raise interest rates twice more across the rest of the year. One increase is expected in September, with another expected in December. September’s rate rise is 93.6% priced in, whilst there is still some market uncertainty regard the 4th rate rise of the year, which is still only 64.5% priced in. The minutes will be scrutinized for any new indication of four rate rises this year, particularly any tweaks to the Fed’s outlook on inflation and the economy.
Trade War
Traders will also be evaluating the minutes closely to see if they shed some more light on policy makers concerns regarding the current US trade policy and risks from increased tariffs. Up to now the Fed has highlighted the trade war as a potential risk but not a sufficiently sized risk to alter the path of rate rises. Traders will be looking for any suggestions that the Fed is growing increasingly nervous of the tit for tat measures being implemented by the US or China.
Potential Market Reaction:
Should the minutes indicate that the Fed is increasingly concerned over the direction of US trade policy, the developing trade war and its potential impact on the US economy, the dollar could continue its downwards trajectory. Given recent comments by Fed speakers, we are not expecting this to be the case.
Should the minutes show the FOMC to be hawkish, continuing to point to four interest rate rises across the year, whilst remaining calm regarding the unfolding trade war, the sentiment towards the dollar could pick up. Market conviction of a 4th hike could also increase which would lift the dollar higher, aiming back towards 96.20 versus a basket of currencies.
We expect traders to wait to see what Jerome Powell says at the Jackson Hole Symposium and whether the trade US – Sino trade tariffs due for application on Thursday are levied, before dollar bulls look to take the buck back towards its recent 14 month high of 96.98.
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