US: Dated FOMC minutes unlikely to impact USD - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar rally has taken breather so far this week after recording strong initial gains following the election of President Trump.

Key Quotes

“The US interest rate market is as good as fully priced for the Fed to resume rate hikes next month and has adjusted to price in an additional 0.50 percent of rate hikes by the end of 2018. We still see scope for US short rates to continue to move higher in the year ahead offering more support for a stronger US dollar although a pause for breath appears reasonable in the near-term after the initial sharp market adjustment. Emerging market currencies which have been hit hardest would be the most likely to stage tentative relief rallies if US yields begin to stabilize at higher levels.”

“The release today of the latest FOMC minutes from their 2 nd November meeting is unlikely to materially impact the US dollar. The minutes are likely to be even more dated than normal following the election of President Trump. The minutes should support expectations that the Fed will resume rate hikes in December acknowledging that the US economy had already regained a stronger footing in the second half of this year and that inflation pressures continue to build. The accompanying FOMC statement signalled less concern over low inflation.”

“The Fed will have been encouraged since by a further rise in market-based measures of inflation expectations following the election. The Fed is now awaiting further details over the likely size of fiscal stimulus under President Trump before updating their outlook for the US economy and monetary policy. We are confident that it will prompt the Fed to speed up the pace of monetary tightening beyond their current plan for six hikes by the end of 2018. In comparison, the US interest rate market remains sceptical pricing in only around four hikes.”