Written by Fed sounds less hawkish than expected
The US dollar fell across the board on Wednesday following the FOMC decision, even though the outcome had some hawkish bits. That said, the greenback is rebounding today, perhaps due to the tensions in the Middle East.
The Fed held interest rates steady, but three members dissented the decision, favoring a quarter-point hike at this gathering. During the press conference, Fed Chair Kevin Warsh reiterated his commitment to bringing inflation to the Committee’s objective of 2%, but he declined to provide clear signals about the next move. He just said “Where necessary and appropriate, we will not hesitate to act."
The US dollar tumbled after the decision despite the somewhat hawkish flavor. Perhaps this was due to investors entering the decision with a decent 35% probability of a rate hike at this meeting, or because market participants wanted clear signals about when policymakers are planning to press the hike button.
This is evident by the fact that, from being fully priced in, a September rate increase now receives a 75% probability, with the remaining 25% pointing to no action. Yet, a second same-sized hike remains fully factored in by March 2027.
Will the BoE hint at a September rate hike?
Attention now turns to the Bank of England. Despite the resurgence in hostilities between the US and Iran in July, British policymakers are expected to keep interest rates untouched again, while, according to the UK Overnight Index Swaps (OIS) market, a 25bps rate hike remains fully priced in for November.
Thus, even if officials decide to stand pat, the new round of geopolitical tensions may encourage more members to dissent from the decision. On top of that, the rebound in the year-on-year rate of oil prices is posing upside risks to the July inflation prints, which allows little room for complacency.
Therefore, a Committee appearing to act sooner rather than later could encourage market participants to bring forward their rate hike bets, increasing the probability of a quarter-point increase in September, and thereby supporting the pound.
Can the BoJ come to the yen’s rescue?
During the Asian session on Friday, the central bank torch will be passed to the Bank of Japan. Since the prior meeting, when Japanese policymakers raised rates to a three-decade high, their remarks have been leaning to the hawkish side.
However, although the market is still penciling in another 25bps rate hike by the end of the year, the yen did not capitalize on this hawkishness, with dollar/yen hovering slightly below the 164.00 zone. Perhaps investors do not believe that the BoJ can become more hawkish than it is now, especially with PM Takaichi calling for interest rates to remain low. Takaichi cannot directly intervene in the BoJ’s plans but deciding whom to appoint to the Board could make a big difference. Thus, even if a hawkish message boosts the yen tonight, any decline in dollar/yen is likely to remain limited and short-lived.
Wall Street Dips as Tech Earnings Loom
On Wall Street, all three indices closed in the red on Wednesday, with the Dow Jones losing the most ground. The slide on Wall Steet came despite the Fed appearing less hawkish than expected. Perhaps investors reduced some of their risk exposures ahead of earnings by tech giants Microsoft and Meta, as well as semiconductor chipmaker Qualcomm.
Microsoft gained more than 7% in extended hours trading, as the firm reported strong growth in its all-important cloud business Azure, but Meta slipped despite delivering record Q2 sales. Perhaps traders focused on the spending outlook, which pointed to increasing capex. Qualcomm’s shares also fell on weak guidance and signals that it would raise prices to counter a spike in costs.
Yet, indices futures are pointing to a modest recovery for today, though more earnings results are scheduled to be announced after the closing bell. Among the firms reporting today are Apple and Amazon.
by XM.com
