Federal Reserve Minutes Preview
Today’s release (at 1900h UK time) of the minutes of the Federal Reserve’s August 1 meeting might not be expected to cause too much turbulence in the currency markets but there a couple of things that traders might wish to keep an eye out for, especially given that markets continue to price in the likelihood of a September US rate hike. If the Fed minutes allude to prior market volatility (or even makes a specific linkage between recent market developments and prior Fed policy tightening) that might materially impact market expectations about future rate hikes and the timetable for Fed balance sheet reduction, potentially weighing on the USD in the process. There’s also the possibility that these Fed minutes will also focus on whether the Fed will continue to implement its monetary policy through a ‘floor’ system whereby the US central bank fixes the interest rate it pays on excess reserves held with it by banks (IOER) so as to control the keynote fed funds rate. That might all sound a bit technical but essentially a continued Fed commitment to a ‘floor’ approach should lend itself to a larger size for the Fed’s balance sheet than the market might otherwise expect, potentially buoying US Treasury prices, thus lowering US Treasury yields and possibly eroding one pillar of support for the USD.
by Neal Kimberley, External Currency Analyst.