Trading the Fed’s Minutes
An interest rate hike from the Fed hasn’t been this close to materializing in more than half a decade. Consensus estimates are zeroing in on the Fed’s September meeting as the right time for a liftoff. As such, focus – and tension – over the Fed’s statement is growing. It’s no wonder then that the release of the FOMC minutes, aka the Fed’s protocol, will garner most of the market’s attention. The Fed minutes, which will be released on Wednesday, should reveal the answers to a number of important questions. For instance, how many (if any) FOMC members voted in favor of a rate hike? How does the Fed view the current health of the US economy? Moreover, have the FOMC member dropped any clues as to the timing of a rate hike.
The Fed could signal that September might be the target month for a rate hike. That would support the dollar, mainly vs the Yen and the Euro, and it could slightly temper Wall Street sentiment. But what if the Fed’s protocol surprises with a signal of an August rate hike? That means the Fed’s protocol could be a wild card in this mix. That would hit FX sentiment hard and could send the Dollar substantially and broadly higher. On the other hand, the Fed could attempt to cool down the rate hike talks. That could cause investors to shift their rate hike target month to December, and ignite dollar selling even as it supports Wall Street.
Bank of England Splitting?
The Bank of England’s rate decision this Thursday will be the second big event on this week’s radar. Although a rate hike is not expected at this meeting, the sense of a growing split within the BoE board is rising. That will take investors’ interest in the Bank’s decisions to a whole new level. Wages are continuing to grow at a fair pace and UK growth is on a stable footing. Thus, some members are ready to vote for a rate hike, possibly as soon as August. Conversely, some MPC members, including Governor Mark Carney, foresee external risks to growth as a daunting factor. This mildly dovish bias adds up to the view held by the BoE’s chief economist, Andy Haldane, who believes the UK is not yet ready for a rate hike.
Investors will be keen to examine the BoE monetary statement and gauge whether the growing rift is reflected in the Bank’s official stance. If so, it means that the pressures of raising rates within the MPC is increasing. It further suggests that the BoE will have a hard time maintaining the cap on the benchmark rate at 0.5% if UK indicators continue to improve.
Of course, if this is the case, it will be positive for the Pound Sterling while mildly negative for the FTSE100. Sterling has been propelled by a strong tail wind over the past few months, given a brightening outlook. Any signs of more hawkishness from the BoE could increase the Pound’s allure even more.
Down to Business
Overall, this week’s focus will be on the two major central banks; the Fed and the BoE, and in that order. If the Fed protocol signals a rate hike could be as soon as September, the dollar could rally. If the protocol suggests that an even earlier rate hike, the Dollar could have a strong week, rallying across the board. But any disappointment in the Fed’s rhetoric could leave the dollar exposed, mainly to its peer across the pond, the Pound Sterling.
On the plate
RBA Rate decision(Tuesday) – If the RBA decides to leave the rate unchanged and sounds more upbeat in its statement the Aussie could gain ground.
FOMC Minutes(Wednesday) – The main event of the week. If the FOMC minutes signal rate hikes are coming as soon as September or August the dollar stands to gain.
BoE Rate decision(Thursday)- If the BoE rate decision statement reveals a split BoE board , it could propel the Sterling higher.
Chart of the Week – BTC