Fed Anchor Seeks Ocean
Judging by the scale of dollar weakness so far this weak, it appears that markets are geared up for a soft set of FOMC minutes. Our economists expect the text to reflect the ‘slight’ dovish changes to the statement. However, the base case is still for a September ‘pre-announcement’ of tapering. Nonetheless, our economists also ‘expect the July 30-31 minutes to keep alive the debate about timing’. The usual nods to inflation and labour thresholds aside, one feature of the July statement was a reference to mortgage rates, which the Fed noted had ‘risen somewhat’. Like its peers, the Fed has shown discomfort with trends in interest rates or a specific instrument, but in a policy/guidance context, this doesn’t appear enshrined in the same way as the ECB (front-end EONIA) or BoE (future base rate pricing). Should this change and/or the FOMC identifies another target, the dollar will respond.
Read the full report: UBS