FX Daily: Hawkish Tone from FOMC Minutes and Norges Bank Hike Impact
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FX Daily: Someone is still hiking
The July FOMC minutes signalled clear openness to more tightening, but market pricing did not move a lot. The FX markets seemed more sensitive to that, and the dollar is enjoying some good momentum. Meanwhile, Norges Bank should hike by 25bp today, and this may not even be their last move; we still see NOK gains ahead.
USD: Hawkish minutes, reluctant pricing
The minutes of July’s FOMC policy meeting released yesterday showed the majority of members kept seeing upside risks to the inflation outlook and left the door open for more tightening. That mirrors what was previously indicated in the dot plot projections, but we think that the encouraging developments on the disinflation side mean the Fed won’t have to hike again and will instead opt for a long pause before cutting in 2024.
The dollar found some support after the release of the minutes, although the Fed Funds Futures did not move significantly, still pricing in a 30% probability of another Fed hike. The reluctance to price in a greater probability is keeping the dollar’s gains limited.
On the data side, our US economist debriefs yesterday’s set of releases here. Mortgage rates are hitting fresh highs, but that is failing to trigger the kind of house price correction we see elsewhere in the world, as crushed supply keeps prices elevated. Ultimately, Fed rate cuts next year could be the trigger for a real estate price correction should that allow a rebound in supply. On the industrial production side, a strong read for July contradicted the ISM manufacturing index, which had suggested the sector has been contracting for nine consecutive months.
Today, the jobless claims will be watched closely after a surprise jump last week, and the calendar also includes the Philadelphia Fed Business Outlook for August and July’s Leading Index. The dollar is enjoying some modest bullish momentum – also helped by more worrying news from China’s real estate sector - but it may be lacking a clear catalyst to break above 104.00 (DXY) before the end of the week.
