• GBP/USD has kept in line with recent ranges in calm markets post FOMC minutes.
  • FOMC minutes have not been as hawkish as the dollar bulls would have hoped for. 
  • Main takeaway: Patient approach appropriate to policy for some time.

GBP/USD is currently trading at 1.2687, up from a low of 1.2642 and below the 1.2719 highs. The FOMC minutes have arrived with their patient approach for some time as the best way forward highlighted with many of the Fed officials saying that inflation is likely transitory. However, there were a few Fed policymakers that monetary policy might need to be tightened if economy evolves as expected. 

Key notes from the minutes:

  • Patient approach appropriate for some time even if global conditions improved.
  • Many Fed officials saw inflation to as likely transitory.
  • Fed discussed pros and cons of shortening bond portfolio maturity
  • Generally agreed a patient approach to interest-rate policy changes was warranted.
  • A few Fed policymakers said that monetary policy might need to be tightened if economy evolves as expected.
  • Many Fed policymakers said holding shorter duration maturities could help future maturity extension programs.
  • A number of Fed policymakers said a portfolio of more capacity for a maturity extension program was more desirable than a proportional portfolio with maturities similar to those of outstanding treasuries.
  • Many Fed policymakers said recent dip in PCE inflation likely to be transitory.
  • Discussed options for reaching the long-term portfolio composition, considered accelerated versus gradual approaches.
  • Several of Fed worried by risk of low inflation expectations.
  • Some say low inflation could on anchor expectations.
  • Inflation pressures remain muted.
  • Few note there still may be slack in the economy.
  • Some say downside risks to growth decreased.
  • Most say downside risks to growth remain.

GBP/USD is hardly changed on the minutes, down 14 pips, and the dollar bulls, in need of some additional support to make a material impact on the 98 handle, should be disappointed that there was nothing more hawkish. Instead, they will have to rely on the rest of this week's domestic economic data, looking for an improvement in Markit Manufacturing and Services PMIs, New Homes Sales data and Durable Goods.

Meanwhile,  for the pound, as analysts at Westpac said, "Uncertainty is the only clear certainty in the near term." The focus stays on Brexit and the UK economy which has sent GBP t the lowest levels for the year in the 1.2620s. The pound and Brexit have been the focus midweek ahead of the FOMC Minutes today, where GBP/USD sunk to a yearly low of the 1.24's. The market fears over the fate of Brexit mounted up following the PM May's latest attempts to get a deal done has once again hit a brick wall - hanging on by the skin of her teeth to the top position in the UK government. Other news came with British Steel being put into liquidation and softer UK inflation leaning heavily. 

PM May's tentative position on a knife's edge

With respect to PM May's tentative position on a knife's edge, the analysts at Westpac explained, "resignation, whether forced or cajoled, would likely lead to a caretaker PM being appointed whilst the leadership selection takes place. This would ensure that the functioning of Government would continue whilst the process unfolds and Brexit would therefore effectively be on hold. Once a new leader is appointed the battle to find a solution to the current impasse would then resume."

Moreover, the analysts added,

"The Bank of England would have little option but to remain supportively on hold whilst this unfolds. Uncertainty is likely to weigh on GBP and UK yields but without any major moves unless there is a break in the likely process."

GBP/USD levels

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