Fed Member Comments Confuse Dollar Ahead of Minutes

The USD Awaits Fed Minutes from July FOMC Meeting

The comments from San Francisco Federal Reserve President John Williams about rising inflation targets in the U.S. quickly lowered market expectations of a hike to the American benchmark interest rate. The USD has benefitted from strong U.S. employment fundamentals but those have been offset by shaky consumer spending and investor’s disbelief of a September hike due to the U.S. presidential election cycle.

The U.S. Federal Reserve has not offered any guidance on their next monetary policy move and continues its dependancy on data. The July statement was more hawkish than anticipated as the central bank added: “Near-term risks to the economic outlook have diminished”. The statement last month was not followed by a press conference so doubts remain what were exactly the risks being monitored by the Fed and more information will be released on Wednesday.

The minutes from the July Federal Open Market Committee (FOMC) meeting will be published on Wednesday, August 17 at 2:00 pm EDT. There are no major surprises expected but the market will be looking for details on the risks mentioned and how the notes from three weeks ago matches with the current trading reality.

The EUR/USD has gained 0.826 percent in the last 24 hours. The single currency is trading at 1.1277 after comments from the president of the San Francisco Federal Reserve John Williams made comments about raising the inflation ceiling which could reduce possibilities of a U.S. benchmark interest rate rise in the near future. The USD managed to regain some ground after another Fed president William Dudley said that a rate hike in September was still possible. The USD is getting punished as interest rate divergence expectations shrink as central banks around the world ponder their next move. The actions of the Bank of Japan (BOJ), European Central Bank (ECB) and the Bank of England (BoE) has left them with little ammo going forward and the U.S. Federal Reserve who tapered its QE program and started hiking rates last year has not changed monetary policy since December 2015.

The U.S. Federal Reserve has pulled back its forecasts of tighter monetary actions as the global economy is slowing down much faster than anticipated. Economic shocks in China and the continuing saga of the Brexit vote have put pressure on other central banks to act to avoid the pull of deflation of their economies. The U.S. economy by contrast is growing and even if the pace of growth has slowed down indicators such as the strong employment data have kept dollar anxiety at bay. The Fed can afford to be cautious and wait for the right economic conditions before it moves again, this is a luxury few of its global counterparts enjoy but central bank patience will weigh on the dollar as it pressures it downward.

The last Fed meeting without a press conference was back in April. The statement for that month was not remarkable, but no so the minutes that seemed to show an unexpected hawkish Fed. The language and topics of conversation made markets rebalance their forecasts and for a brief moment it put the June FOMC meeting back in the picture for a rate hike. Traders could be facing a repeat surprise as Chair Yellen and the rest of the voting members expand on the reasoning around diminished risks. Those risks might not be as diminished as even with strong back to back employment reports the U.S. economy has not been able to create inflation and it is worrisome that consumers are reducing purchases despite low prices. Kansas City Federal Reserve President Esther George was once again the lone dissenter with a vote for higher rates in July.

Market events to watch this week:

Wednesday, August 17
4:30am GBP Average Earnings Index 3m/y
4:30am GBP Claimant Count Change
10:30am USD Crude Oil Inventories
2:00pm USD FOMC Meeting Minutes
9:30pm AUD Employment Change
Thursday, August 18
4:30am GBP Retail Sales m/m
8:30am USD Philly Fed Manufacturing Index
8:30am USD Unemployment Claims
Friday, August 19
8:30am CAD Core CPI m/m
8:30am CAD Core Retail Sales m/m

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza