USD: There will be no Fed rate hike today. This news is unlikely to come as a surprise to
many market participants if the Fed publishes its statement tonight following its July meeting.
Instead USD investors will be looking further ahead, as that is where the uncertainty lies.
Fed chair Janet Yellen might have stopped the downtrend of rate expectations in early July
by stating that she considers a rate hike before year-end to be likely. It remains unclear
though when this first rate step is going to take place – and how quickly further steps will
That means that attention today is likely to mainly focus on the conclusions the July statement
allows on the timing of the first expected rate step. There are only two more possibilities
this year: the September or the December meeting. These are the only opportunities for
the Fed to explain the rate step during a press conference – a possibility that it is unlikely to
According to Bloomberg market participants consider the likelihood of a rate step in September
to be just under 40% – and that means: more likely that there will not be a rate step
quite yet. However, that may change tonight. Nine years after the last rate hike the uncertainty
is high as to how the financial markets will react to a rate hike. As a result the Fed has
much to lose but nothing to gain if it leaves the market in limbo about its rate plans. If it is
planning a rate step in September it is likely to announce that tonight. It is unlikely to become
quite as explicit as it did 11 years ago when it initiated the last rate hike cycle. The Fed does
not want to commit in advance, as some important data is still due for publication over the
coming two weeks which it will want to wait for, in particular GDP data for Q2 tomorrow and
the labour market report next week.
However, as the US economy is generally developing
as the Fed foresees1 we expect it to pave the way for rate hikes in September tonight, but
leaves scope to postpone the rate rise until December should the data disappoint.
Does that mean that there is a risk of major adjustments to USD positions today if the expec-tations of a first rate step in September moves closer either towards zero or 100? Hardly. Of course USD is going to benefit from a first rate step in September – assuming that this makes a further rate step this year more likely as that is not currently priced in by the market. And only if the market sees a reason to price in a more aggressive monetary policy are the USD exchange rates likely to change. But today’s statement is unlikely to cause the market to re-evaluate risks which have so far prevented it from expecting higher interest rates – above all the deteriorating economic outlook in China and the fact that a break-up of the euro zone can still not be excluded completely. A generally stronger USD? Yes, but not a breath-taking appreciation.