The trading week started with a holiday, as the United States celebrated Independence Day. For this reason, the main economic events scheduled in the first week of a trading month were a bit delayed.
But market participants did get to learn what the Federal Open Market Committee (FOMC) members discussed at their last meeting three weeks ago. Unsurprisingly, the minutes released yesterday were bullish for the US dollar as they hinted at more tightening in the period ahead.
So here are three takeaways from the FOMC Minutes released yesterday:
No disagreement among officials
Monetary policy in the US to continue on the same path
US dollar to remain bid
There is no disagreement among officials
There is usually some sort of disagreement among officials at every FOMC meeting. Not this time.
This time everyone seems to be in the same boat, wanting to raise rates to restrictive levels and to see inflation coming down to the Fed’s target as soon as possible.
Fed to keep tightening the monetary policy
The minutes showed that the Fed is unlikely to alter the course of its recent monetary policy. The Federal Reserve has raised the funds rate this year, and it did so by adding 75bp in June alone.
For July, the market expects another 50bp or 75bp rate hike. Based on yesterday’s minutes, one cannot exclude either of the two, but it really doesn’t matter from an interest rate differential.
Even if the Fed hikes the rates by only 50bp, the interest rate differential between the Fed and other central banks in advanced economies continues to widen. Hence, investors’ appetite for US dollars is likely to continue.
Demand for US dollars to remain solid
The US dollar is on a sharp move higher in 2022. It squeezes short-sellers and offers a good excuse for the Fed to keep tightening because a strong currency helps in an environment of rising prices.
Take the European Central Bank, for example. It has a tough job in setting the monetary policy when inflation is near the rate in the United States, but the common currency, the euro, is extremely weak and declining in value.
To sum up, the dollar is set to remain bid on dips as the Fed hints that it will keep the monetary policy course unchanged. As such, expect the dollar squeeze higher to continue over the summer and into the second half of the year.
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