The FOMC statement provided a little sparks to markets yesterday. The Fed finally acknowledged firmer inflation prints, indicating that the Committee now judges, “that the likelihood of inflation running persistently below 2 percent has diminished somewhat.” However, this comment was offset in part by the following statement,” a range of labour market indicators suggests that there remains significant underutilization of labour resources.” The Plosser dissent was also a hawkish surprise.
While overall the Fed did not provide any significant surprises, the overall tone of the growth and policy mix in the US is setting the USD up for a sustainable rally in the fall. Indeed, with QE set to end in October and two more employment reports, the September 17 FOMC meeting the perfect forum for a shift in the Fed’s tone. Recall, the Fed will provide its updated forecasts and a press conference at the September meeting.
To us, we think the Fed will want to see the August employment report before a potential shift in tone, suggesting it is unlikely to announce any policy shifts at the Jackson Hole symposium in August.
For now, we think the 82.00 level will remain key source of resistance for the DXY but look to buy USD on dips ahead of the September FOMC meeting
CA