Forex Trading Library

FOMC Minutes and the Rising Dollar

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The dollar could get another boost tomorrow following the release of the minutes of the last FOMC meeting. What investors are likely to be mostly focused on is how likely the Fed is to raise rates either in September or November. Besides the general lack of confidence in the global economy, increased chances of a rate hike could be the next thing to support the greenback,

The markets and the Fed are at odds when it comes to rate hikes. The Fed insists there will be at least one more rate hike from here to the end of the year. There are only three more policy meetings for that to happen. The vast majority of traders believe there will be no rate hike in September. About two thirds are expecting no rate hike in November, either. And, among the ones who expect a rate hike in November, a small number of them are expecting rates to go back down by December, leading to a total of 66.5% of traders expecting no rate hikes for the rest of the year.

Who’s right?

It seems that in a debate over what the Fed will do, the Fed will probably be right. But the economy is unpredictable, and the difference in views is based on differing outlooks for the economy. The Fed’s GDPNow tracker suggests that Q3 GDP will again sprint a head, right now forecasting 4.1% annualized growth. This more than doubles the 1.9% growth that is the average among economists’ forecasts for the same period.

The US economy has remained surprisingly resilient, despite a strong majority of economists expecting a recession this year. Despite interest rates climbing, the US consumer has continued to spend. But, there have been a few warning signs, such as credit card debt piling up to $1.0T, and delinquencies rising. So far, it hasn’t been enough to affect the underlying economic activity, however. Which is why there could be renewed attention on consumer data, some of which will be released this week.

The undefeated US consumer

US retail sales for July are expected to accelerate to 0.3% growth from 0.2% growth previously. While this might be overall good for the economy, and help support the dollar, it likely adds to a growing headache at the Fed. With inflation coming down, real wages have now turned positive, which could help maintain consumer demand. That demand could keep price growth from falling back to the Fed’s target, and might necessitate more rate hikes.

That’s likely to be the focus of investors pouring through the FOMC’s minutes: Just how concerned are the members of the committee about labor tightness. The more they express views that something needs to be done to address the labor market, the more likely the market will interpret a rate hike. But if the FOMC seems happy with inflation coming down as much as it has, the dollar could weaken a bit.

With the latest data from China showing more underlying economic problems than previously expected, the focus has switched back to the US. Normally the dollar is a safe bet during periods of economic troubles. A period in which the US economy remains resilient while other major economies face turbulence could only exaggerate the demand for the greenback.

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