Market participants are sensitive to the Fed’s plans to tighten policy and remove support for the US economy. The US dollar has strengthened by around 2.5% since the Fed’s hawkish policy update at the 16th June FOMC. Economists at MUFG Bank expect the US dollar to remain on a strong foot as fears of higher inflation quickly shift to growth concerns.
FOMC minutes avoid delivering another hawkish surprise
“The Committee as a whole agreed to begin the taper planning process ‘in coming meetings’ so they could be positioned to move more quickly if that become appropriate. The option to move more quickly in tapering QE was to help dampen upside risks to inflation expectations. That appears less of a concern now though with market–based measures of inflation expectations and bond yields falling in response to growth concerns.”
“Recent developments would suggest that the Fed is more likely to wait until later this year rather than take out the option of an earlier taper in September.”
“The FOMC minutes did not provide another hawkish surprise which has resulted in a more limited market reaction overnight. Nevertheless, market participants are becoming more wary of the prospect of tighter policy.”
“We expect the US dollar to remain bid in the near-term while market participants remain more concerned over the global growth outlook even as US yields have dropped back sharply recently.”