Surviving the minutes
The US Dollar has so far survived the release of the meeting minutes of the Federal Reserve’s latest monetary policy decision. As we have discussed recently, the million Pound question in markets at the moment is when will the Federal Reserve and other key central banks reach the peak point of acceleration in monetary adjustment. The consensus answer so far has ebbed and flowed across the threshold of ‘peak hawkishness’.
The minutes from the Reserve’s most recent meeting confirmed that officials last month largely agreed that the pace of interest rate hikes could and should be dialled back. However, quite unsurprisingly the Committee is opting for a data-led approach once again keeping a keen eye on inflation. In the words of the Committee itself: “it likely would become appropriate at some point to slow the pace of policy rate increases”. The uncertain language from the minutes has likely continued to feed the appetite of USD bulls and allow them to continue to argue that the Reserve still has a lot of monetary adjustment left in the tank for later this year. As the minutes are digested further, especially in an environment of moderating inflation and inflation-exposed soft data, the Dollar could be vulnerable to selling pressure.
Inflation data released yesterday featured a headline publication of 10.1% inflation year-on-year for July. The psychologically significant double digit figure outpaced forecasts of 9.8% and the June reading of 9.4%. The headline inflation figure is being driven in no small part by the cost of energy. With the price caps set to rise in the UK later this year and next, that component of the inflation outlook is set to rise concomitantly.
The jury will be out therefore as to whether the Bank of England will be focussing on core inflation or the headline inflation figure as it continues to adjust policy later this year. The answer to this question will be key to determining the preferred path of the Bank of England and therefore Sterling. Concerningly, yesterday’s core inflation also showed a considerably above-forecast reading suggesting inflationary pressures continue to be more widespread than the energy sector within the UK economy. European gas futures continue to hit record highs this week as traders scramble to secure scarce gas supply ahead of the European winter, meaning that the headline inflation figure is unlikely to find respite anytime soon.
Discussion and Analysis by Charles Porter
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