USD: Will the Fed hike its Fed funds rate in September? Perhaps – and perhaps not. That is
what the Fed signaled to the markets in its July meeting minutes. Most FOMC members
judged that “the conditions for policy firming had net yet been achieved” but they noted that
“conditions were approaching that point”. The minutes did not contain any signals about the
timing of the first rate step. For the FOMC, the decision still hinges on the data. The FX
markets have decided on “perhaps not” and sold USD. The Fed fund futures suggest that
only about one-third of the FX market participants now expect a rate step in September. The
Fed’s dilemma is becoming increasingly clear. While inflation is still low and the worries
about China and the firmer USD trigger some concerns about downside risks to inflation, the
economic and labour market developments make it increasingly difficult to delay the first rate
hike. A rate step in September is therefore still on the cards. Until then, several key US data
will be released which might tip the balance in favour of September. We remain EUR-USD
sellers at a level around 1.12. [Commerzbank]
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