Thought of the day
06.07 - Reading through Fed speak
Fed Chair Yellen has been widely regarded as striking a dovish tone in recent weeks, after sounding caution on the recent softening in US inflation at the Fed's June press conference. The US dollar has weakened by 0.9% since then.
But with the market only pricing in a low probability of a September hike, the Fed minutes suggest the committee is looking to keep its options open, and is relatively relaxed about the low level of price rises. The minutes revealed that the recent weakness in inflation was largely attributed to idiosyncratic factors, and “nearly all” members expected mid-term inflation to reach target level of 2%, supported by a still-falling unemployment rate, already at a 16-year best of 4.3%.
So while the Fed may yet be forced to stay on hold if core PCE inflation does not pick up in the months ahead, our base case remains one more hike this year (likely in September), and a start to balance sheet reductions by year end. Nonetheless, we prefer the euro, which remains undervalued relative to the US dollar, in our view.