Commerzbank’s Antje Praefcke says markets will scrutinize the latest Fed minutes for clues on how close policymakers remain to another rate hike after weaker US labour and inflation data reduced expectations for a hike by year-end. Any repricing of a September rate hike could provide some support for the US Dollar, but a fundamental shift in Fed rate expectations and sharp Dollar moves remain unlikely.

Fed minutes and Dollar rate repricing

“The minutes from the Fed meeting at the end of July are likely to draw attention tonight, at least insofar as the market may try to discern just how close the FOMC members ultimately were and still are to raising interest rates. The new Fed Chairman, Kevin Warsh, intends to comment less on monetary policy and let the market do its job.”

“After all, the Fed – and the Fed alone – is responsible for price stability through its setting of the federal funds rate, not the market. That is why I also think that, in the absence of clear statements in the press release and at the press conference following the Fed meeting, the market might try to learn a little more about the discussions among FOMC members from the minutes.”

“Whether this will be successful remains to be seen – especially since, following the Fed’s last meeting in late July, the labor market and inflation figures had already come as a surprise with weaker-than-expected results. Which is why the market is no longer fully pricing in an interest rate hike by the end of the year.”

“At the very least, should an interest rate hike in September have been a real possibility after all, the market could raise its rate hike expectations for the Fed slightly again and thereby provide support for the dollar, provided the fundamentals warrant it.”

“However, a fundamental reassessment of interest rate expectations – and the resulting sharp movements in the dollar – is unlikely to occur.”