EUR/USD Surges On Fed Minutes; Gold Breaks Above 1127

 | Aug 20, 2015 04:29AM ET

• Fed “approaching” hike conditions, but not yet there The minutes of the latest FOMC meeting showed that most Fed officials judged that the conditions for a rate hike are approaching but had not yet been achieved. The uncertain tone of the minutes suggested that the members were somewhat less likely to raise rates at their September meeting, mainly due to concerns over inflation that is not yet moving towards the necessary conditions to justify a rate hike. As mentioned in the minutes, “Almost all members indicated that they would need to see more evidence that economic growth was sufficiently strong and labor market conditions had firmed enough for them to feel reasonably confident that inflation would return to the Committee’s longer-run objective over the medium term.”

• In addition to wariness over the pace of the inflation, it’s important to keep in mind that events since the July meeting –China’s yuan devaluation– will probably give FOMC members a new reason for caution. This could make Fed’s decision even more difficult. Another important point in the minutes was the FOMC members attempt to communicate once again that the expected path for policy, not the initial increase, would be the most important determinant of financial conditions. USD pulled back sharply after the minutes were released and the probability of a September hike fell to 40% from around 50% before. Nevertheless, following the July FOMC minutes, we retain our view that September is the most likely month for a lift-off. However, the bar for the rate hike has been pushed a bit higher, given the lower energy prices and the weakening international outlook since the July meeting.

• Today’s highlights: Sweden’s official unemployment rate for July is expected to decline. The PES unemployment rate for the same month increased a bit, raising questions over expectations of a strong decline in the official figure. In any case, a decline in the jobless rate could strengthen SEK at the release.

• In Norway, Q2 GDP is expected to contract from the previous quarter, while the mainland GDP is expected to expand at a slower pace than in Q1. Following the below-expectations inflation rate last week, this may add pressure on the Norges Bank to ease at its September meeting. This could prove NOK-negative.

• In the UK, retail sales for July are forecast to have risen, a turnaround from the previous month. Last month, GBP plunged after the country’s retail sales unexpectedly fell in June, disappointing investors who were expecting a strong reading. Therefore, a strong reading in July is likely to strengthen GBP, as this will add to the solid wage growth and support BoE officials’ expectations that inflation is likely to pick up towards the end of the year. With the UK inflation rate back above zero, market participants will be closely watching the data for signs of demand-pull inflation.

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• From the US, we get the initial jobless claims for the week ended on August 15 and the Philadelphia Fed Business activity index for August. The Conference Board leading index for July is expected to decelerate somewhat from the month before. Existing home sales for July are also coming out. The housing starts and building permits released earlier this week were consistent with an improving housing market. Therefore, another strong housing figure could strengthen USD.

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