USD may see short lived gains post Fed decision

“The jobs market remains robust, although it is not crying out for higher rates either. Jobs growth moderated in June and wage pressures have eased from their highs, without weakening enough to raise recessions concerns - a “goldilocks” state that provides the Fed with no real urgency to hike. 

“In truth, the upward repricing in rates is entirely a fallout from the latest news in the Iran war. The problem for policymakers is that there is no real telling as to how long the latest flare up will last, and markets are left pricing in the dark. 

“Our base case remains a peaceful resolution, particularly with the midterms on the horizon and Trump’s favourability rating drifting lower. Still, timing is everything here and we would really need to see some visible progress soon if the Fed is to hold off from hiking in September. 

“Barring a miraculous, out of the blue peace announcement, we think that the Fed will have no choice but to strike a hawkish note on Wednesday. 

“The statement will once again be a short one, and will no doubt avoid the type of forward guidance that chair Warsh has shown a clear aversion to. 

“We instead expect the Fed to rely on familiar phrases about “elevated uncertainty” and a data-dependent approach. This would provide the bank with maximum flexibility to hike at future meetings, without needing to explicitly say as much. 

“To move the needle, Warsh may need to firmly signal that a September hike is coming, yet his well documented aversion to forward guidance means that this seems unlikely. 

“The more probable outcome is one where the Fed illustrates a hawkish intent without confirming it outright, something that we think risks disappointing markets that are already pricing in a lot of positive news for the dollar. 

“This could mean that any post-FOMC meeting gains in the dollar are short-lived, barring a further escalation in the Iran conflict and advance in oil prices.”