The highlight of the forex week will be Wednesday’s release the minutes from the last FOMC meeting. That was seen as a hawkish hold, as there were three dissenting votes in favour of a hike. Dissenting votes in the Fed is relatively rare and suggests there are strong divisions about what to do with rates.
The minutes will have to be interpreted within the new data context. US jobs figures significantly disappointed from the last meeting, and inflation indicators were lower. The minutes will give some crucial insight into Fed thinking ahead of the pivotal Jackson Hole Symposium which will take place next week. FOMC members have the opportunity to revise their comments in light of data since the meeting, which could provide additional information for analysts.
When Will the Fed Hike?
Despite the softer numbers, the consensus in the market still seems to be that the Fed will hike rates this year, it’s just a matter of timing. Since the surprisingly weak US July Non-Farm Payrolls data, the market has shifted to expecting a rate hike at the October meeting. The odds of a September hike are around just one third.
The shift has generally weakened the dollar in the interim, allowing gold to move higher. However, the concern seems to be around economic growth, as the pound gained against the dollar more than the Euro. With most major central banks expected to hike later this year, the interest rate gaps are projected to stay broadly stable. What is likely to influence the market, therefore, is more the timing of the hikes, and economic conditions.
Is Crude Actually Raising Inflation?
One of the key takeaways from last week’s US CPI data was that the headline figure remained elevated amid higher prices at the pump. But PPI was lower than expected and the core rate remained steady despite months since crude prices spiked as a result of the war in the Middle East. This implies that the “second round” effects of energy-driven inflation have not manifested yet. Without signs of persisten inflation pressure, the central bank has less need to raise rates.
That will likely be one of the things that investors pay attention to in the minutes. Whether members expect inflation to pick up later, or they see signs of persistent inflation could indicate that a hiking bias will remain. But, if members are just concerned about energy prices, which are likely to be temporary, then then the market might come out with a more dovish interpretation.
Counting Hawks and Doves
The main focus will likely be on the number of members who supported higher interest rates but didn’t go so far as to dissent. If that’s close to a majority, then the market might move to price in a rate hike at the next meeting, which would likely support the greenback. On the other hand, if it were just the three dissenters who were hawks and the others were OK with waiting, the market could see that as more dovish.
Given the recent soft jobs data, traders will also pay attention to FOMC members’ views on employment. If there was a general view that the jobs market was recovering, and that justified a hawkish stance, the market might see that as dovish. Because it means that there has been a shift in the underlying data that the Fed is using.
