Matthew Ryan, Head of Market Strategy at global financial services firm and FX specialists Ebury, comments on the latest Fed minutes and the impact of renewed geopolitical tensions on US rate expectations.
Wednesday’s Fed meeting minutes, which were highly anticipated given that these were to be the first released since new chair Kevin Warsh took the reins at the FOMC, elicited a fairly muted reaction among both rates and FX markets.
The communications delivered a bit of something for everyone, with officials seemingly split over the path ahead for policy. While some of the committee argued that rates could be hiked should inflation remain elevated, there was a contingent that indicated that the appropriate levels for rates would be around or just below current levels should inflation ease.
Now clearly this lack of consensus means that investors have very little to go on, which can explain the muted reaction in the dollar. What it does stress, however, is the importance of the inflation trajectory.
Without question, Trump’s latest outburst on Iran means that these inflationary risks have increased, though whether this is a temporary setback in the talks or an irreconcilable impasse will dictate how the Fed proceeds from here.
Futures are currently assigning almost an 80% of a September hike – up from 65% at the start of the week, but that could quickly fall should US-Iran tensions simmer and oil prices retreat.
