FOMC Minutes Reveal Concerns Around Inflation

 | Oct 12, 2017 13:44

Overnight, the minutes of the FOMC’s September policy gathering revealed a relatively cautious stance by policymakers. “Many” participants are concerned that low inflation this year might not reflect only transitory factors, but also developments that could prove to be more persistent. Meanwhile, even though “many” officials thought that another rate hike this year is likely to be warranted, “several” others noted that their decision will depend on upcoming economic data.

Overall, these comments may have signalled that a December rate hike may not be a done deal, as the elevated market pricing for such an action would lead one to believe. As a result, the dollar weakened on the news, albeit only slightly. Market focus is now likely to turn to the CPI data for September, due out tomorrow. Considering the Committee’s uncertainty around the inflation outlook, these prints could play a large role in determining what may happen in December and thereby, the dollar’s short-term direction.

EUR/USD continued rising yesterday fueled by the FOMC minutes and broke above the key hurdle of 1.1830 (S2). At the time of writing, the pair is trading slightly above the 1.1870 (S1) level, but still below the downside resistance line drawn from the peak of the 8th of September. As such, bearing in mind that the rate is now back above 1.1830 (S2), but below the aforementioned downside line, we switch our stance to flat. A break above the aforementioned downward sloping line may carry more bullish extensions, perhaps towards our next resistance of 1.1940 (R1). On the downside, we prefer to wait for a dip back below 1.1830 (S2) before we examine the case for another round of declines.

Gold also edged north after it hit support slightly above the 1283 (S1) line. Although the metal continues to trade above the short-term downtrend line taken from the peak of the 8th of September, we would like to see a clear break above 1300 (R1) before we get confident on more upside extensions. Such a break may set the stage for the 1313 (R2) barrier, marked by the high of the 26th of September.

Zooming out to the daily chart, we see that the 1300 (R1) zone acted as the upper bound of the wide sideways range that contained the price action from the last days of January until the 25th of August. This enhances our view to wait for a move above 1300 (R1) before we assume that the outlook has turned back to positive. As long as the yellow metal is trading below 1300 (R1), we prefer to remain sidelined.

Today’s highlights

During the European morning, Sweden’s CPI prints for September are due out. Both the headline and the underlying inflation rates are expected to have risen. Something like that could lead market participants to bring forward their expectations with regards to the timing of the Riksbank’s first hike and thereby, support SEK.

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We have a plethora of speakers on the agenda. In the eurozone, we will hear from ECB President Mario Draghi, as well as Executive Board members Praet and Lautenschlager. Given our proximity to the October ECB gathering, we expect market attention to centre around potential comments about the pace of QE tapering, particularly any from Draghi. Remarks suggesting the ECB is likely to act in a decisive fashion and provide a clear roadmap for ending its asset purchases could bring EUR under renewed buying interest.

On the other hand, more cautious signals suggesting that the process may be slow and prolonged could work against the currency.

In the UK, the BoE’s influential chief economist Andy Haldane will deliver remarks. With the probability for a BoE rate hike in November currently hovering around 65%, investors will probably look for Haldane to either confirm that probability by signalling his support for such action, or disprove it. We think risks are tilted towards a hawkish tone, given that he recently described the prospect of a rate increase in the UK as a “good news story”, and that wages for Q2 were revised higher after that. In such a case, GBP could regain some of its shine.

In the US, Fed Board Governors Powell and Brainard will both step up to the rostrum. We will also hear from Riksbank Governor Stefan Ingves, as well as BoC Deputy Governor Carolyn Wilkins.

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