Fra DailyFX.com –
Talking Points:
– This afternoon sees the release of FOMC minutes from the most recent meeting in July; and in July, the bank took a slightly more-hawkish stance yet markets continued to expect dovishness. Will the release of minutes from this meeting re-fire USD strength on the back of a more hawkish Fed (such as what we saw in April/May).
– Over the past two days we’ve heard from two different Fed members talking up the prospect of a hike in September. This is, again, very similar to what we saw in May as the Fed tried to transmit a more-hawkish stance to markets.
– This isn’t to say we’re expecting any actual hikes anytime soon, but FOMC expectations have become a primary driver in markets, so traders need to try to ‘expect’ the ‘expectation’ of the Federal Reserve.
Meeting Minutes from the July FOMC meeting are set to be released today at 2 PM ET, and given some of the recent Fed commentary, the delivery of these minutes are lining up to be very interesting. At issue are market expectations around near-term FOMC monetary policy, and this has been a saga that’s deepened in front of our very eyes over the past year.
Throughout last summer, the Fed continued to talk up the prospect of a hike in September (2015). But just about a year ago Chinese capital markets began to crater, and when the PBOC responded by massively weakening the Yuan in a ‘revaluation’ of the Dollar-Yuan peg, global markets ducked for cover for fear of economic contagion. This caused the Fed to back off of those rate hike plans for September, but when the bank tipped that they’d still be looking to hike rates in December. When the bank did finally hike in December, they also accompanied that move with the expectation to hike rates a full four times in 2016.
And for a global economy that struggled for much of the year just to see one rate hike out of the Fed,when this expectation for four hikes was combined with the slowdown in Asia and the carnage in commodity prices, the palette of risk was too much for global markets to bear, and within hours of the open of the first trading day of the new year risk aversion had begun to boil again. And this lasted all the way until Chair Yellen’s Humphrey Hawkins testimony in February, when, in front of Congress, the head of the Fed implied that the bank could employ even more tools (potentially negative rates) in the effort of bringing on inflationary pressure. This was largely inferred as a dovish move from the Fed, as a bank investigating cutting rates into negative territory probably isn’t going to be hiking anytime soon.
