Financial markets remain 'genuinely divided' over next week's Fed decision

Financial markets remain genuinely divided over whether the FOMC will raise rates at next week's September meeting, an unusual state of uncertainty this close to a decision date - welcome to Kevin Warsh's guidance-averse Fed, ladies and gentlemen.

The narrative appears to be that everything now hinges on a single data point: Friday’s CPI print for August. We tend to agree, and certainly a hot number here could embolden some of the doves to shift allegiance in favour of a hike next week.

Yet Warsh's stated reluctance to lean too heavily on incoming data means even a hot CPI reading is no guarantee of a hawkish shift.

In the lead up to Friday’s data it may not be domestic macroeconomic news that dictates the path of the dollar, but developments overseas.

The recent sharp rally in the yen, in particular, presents itself as a possible near-term downside risk for the greenback, as aggressive swings in USD/JPY tend to spill out into smaller moves in the dollar against other currencies. A 25 basis point rate hike from the Bank of Japan now seems nailed on for next week’s meeting, but a hawkish set of rhetoric could trigger a fresh break lower in the pair, particularly if accompanied by additional FX intervention in the coming days.