FX Daily: Hawkish Fed Minutes and the Impact on Data Expectations

FX Daily: Hawkish Fed minutes raise the bar for data disappointment

Yesterday’s release of the June FOMC minutes gave very few reasons to doubt the Fed’s determination to keep raising rates. In a way, the bar for data disappointment and consequent dovish repricing may now be higher. Still, expect a hit to the dollar if the ISM services fall into contractionary territory. Job openings and ADP payrolls will also be watched.

 

USD: Growth and jobs under the microscope

The narrative that emerged from the minutes of the June FOMC meeting fell unequivocally on the hawkish side of the spectrum. The summary of opinions confirmed some divergence within the committee, as some members would have favoured a hike already in June, but accepted a pause and signalled instead more tightening via the new dot plot projections. “Almost all” participants thought more tightening was likely this year.

There was also an acknowledgement of ongoing firm GDP growth and high inflation, with core inflation, in particular, showing no tendency to ease as of yet this year. The Fed also noted that credit remains available to high-rated borrowers, but that lending conditions had tightened further for bank-dependent borrowers. Still, the risk of a credit crunch was deemed modest.

All in all, the minutes offered no reason to doubt the Fed will go ahead with a July hike (85% priced in) unless data points firmly in the opposite direction on the economic and inflation side. The hawkish minutes, however, may have further raised the bar for disappointing data to cast doubt on further tightening.

Today, the ISM services figures for June will be closely watched, as last month’s print (50.3) surprised sharply on the downside. Consensus is expecting a rebound to 51.2, while another surprise drop could take the index into contractionary territory – where the ISM manufacturing has been for the past eight months. Expect any surprises on the ISM release to drive most of the dollar reaction today, but markets will also look at some labour data, in particular, the JOLTS job opening figures for May and the ADP payrolls for June.

The dollar has drawn some strength from the hawkish FOMC minutes, which have so clearly pointed to more tightening, that it will probably take some substantial downside surprise for markets re-consider their expectations. With this in mind, the dollar's reaction to today’s data may not prove particularly long-lived, especially if tomorrow’s payrolls continue to point to a tight jobs market and keep a post-July hike on the table.