So, the minutes were considered dovish, which is no surprise since the meeting at the end of July allowed an element of doubt to be thrown in about the prospect of a rate rise next month. The build up to the first rate hike from the US is starting to get tortuous, the market wants clear direction from the Fed, but the Fed is resisting it. Our view is that the decision will come down to the wire, with the market lurching at key employment, wage and inflation data between now and then.
The actual damage done from these minutes is a shift in Fed Funds futures. The Fed Funds futures market is now pricing in a mere 38% chance of a rate hike next month, compared with more than 80% of economists polled by Bloomberg looking for a rate hike. The market is a bit more optimistic of a rate hike in December, with a 66% chance of a move. However, recent events including a sell-off in stock markets and the Chinese currency devaluation has made the market less sure of a rate rise in 2015, and more likely to put their money on a rate rise in Q1, where there is an 83% chance of a rise according to Fed Fund futures.
This is significantly lower than expectations earlier in August, as you can see in the chart below, when the Fed Funds futures was pricing in a 55% chance of a rate rise on the 17th September FOMC meeting.
From a market perspective, this caution on the prospect of a rate hike next month may trigger some interesting market developments in the next couple of weeks:
It could weaken the dollar index, which is testing a cluster of moving averages at 96.40. Below here opens the way to 94.60 – the 200-day sma – and also the lowest level since June.
A weaker dollar could fuel a short term recovery in commodity prices, Bloomberg’s commodity index is at its lowest level since 2002, and oil looks desperately oversold.
If commodity prices rally then it could be an Indian summer for commodity FX bulls.
It could keep the EUR above water. EURUSD has been stubbornly range-bound around 1.10 and has not fallen as much as expected. A weaker buck could support EURUSD downside in the next few weeks, with 1.0850 a medium-term support level. A break above 1.1220 – the high from 12th August – is a bullish development that opens the way for more late summer upside from the euro.
CFD’s, Options and Forex are leveraged products which can result in losses that exceed your initial deposit. These products may not be suitable for all investors and you should seek independent advice if necessary.
Recommended Content
Editors’ Picks
EUR/USD clings to daily gains above 1.0650
EUR/USD gained traction and turned positive on the day above 1.0650. The improvement seen in risk mood following the earlier flight to safety weighs on the US Dollar ahead of the weekend and helps the pair push higher.
GBP/USD recovers toward 1.2450 after UK Retail Sales data
GBP/USD reversed its direction and advanced to the 1.2450 area after touching a fresh multi-month low below 1.2400 in the Asian session. The positive shift seen in risk mood on easing fears over a deepening Iran-Israel conflict supports the pair.
Gold holds steady at around $2,380 following earlier spike
Gold stabilized near $2,380 after spiking above $2,400 with the immediate reaction to reports of Israel striking Iran. Meanwhile, the pullback seen in the US Treasury bond yields helps XAU/USD hold its ground.
Bitcoin Weekly Forecast: BTC post-halving rally could be partially priced in Premium
Bitcoin price shows no signs of directional bias while it holds above $60,000. The fourth BTC halving is partially priced in, according to Deutsche Bank’s research.
Week ahead – US GDP and BoJ decision on top of next week’s agenda
US GDP, core PCE and PMIs the next tests for the Dollar. Investors await BoJ for guidance about next rate hike. EU and UK PMIs, as well as Australian CPIs also on tap.