Snippet from UBS on the Federal Reserve and US dollar outlook.
On the minutes of the FOMC released this week:
- The minutes didn’t actually deviate much from the script.
- While markets may not have been positioned for a hawkish tilt to the commentary, we see few actual surprises when weighed against consensus economist expectations or the Fed’s own Summary of Economic Projections (SEP). The minutes largely echoed Chair Jerome Powell’s post-FOMC press conference commentary, focusing on labor market strength. The minutes showed two participants advocated pausing rates in July, and “some” raised downside risks to both economic activity and labor data.
And thus their Fed expectations:
- A data-dependent Fed means data-sensitive markets.
- In the minutes, policymakers emphasized the need to clearly communicate the Fed's continued “data-dependent approach to policy” in the coming months. Participants also cited tentative signs of price pressures easing, a view that predates the positive Consumer Price Index release earlier this month, which pointed to moderating headline and core inflation. There is also the potential for further reassuring indications from the August inflation and jobs reports, both of which will be released prior to the Fed's next policy meeting on 19–20 September.
- While our base case is for no additional Fed hikes this year, the risk of further tightening remains if US data continue to beat expectations.
UBS conclude that USD upside should be limited:
- The dollar is again rising as markets continue to reflect the risk of further Fed tightening. But we see limited upside from here, and retain a least preferred view on the currency.
- We are most preferred on the euro, as we think recent economic disappointments are already priced into the currency’s valuation.
EUR/USD update, daily candles:
