Credit Agricole

The June FOMC minutes are the key event of the week with the FX Investors trying to assess the significance of the recent Fed pivot towards inflation and thus the need for gradual policy normalization from here. Focus will therefore be on the two components of the policy discussions. First and foremost, investors will want to learn more about the likely timing of any QE taper. Evidence from the minutes that the officials had more than just a generic deliberation about the merits of policy normalization and, instead, engaged in concrete discussions of the pace and timing of a potential stimulus reduction could be seen as a hawkish surprise. Secondly, following the move higher of the median ‘dot plot’ for 2023, the FX investors will focus on any discussions of an even earlier rate lift-off, with the rates markets already attaching close to 90% probability to three Fed rate hikes in the next two years. The USD could benefit from any hawkish surprises from the Fed minutes today.

Moreover, the data releases since the June Fed meeting have suggested that the outlook for the US labour market has become cloudier (e.g. The U3 unemployment rate as well as the labour market components of the services and manufacturing ISMs for June). Evidence from the minutes that the FOMC is now firmly focusing on responding to the continuing inflation overshoot could fuel concerns that any policy normalization could trigger an unwarranted tightening in the US and global financial conditions, hurt risk sentiment and give the safe-haven USD a boost in the near-term. We therefore stick with our short GBP/USD position as a risk aversion hedge. That being said, we doubt that the FOMC would want to fuel market anxiety and believe that the policy makers would adjust their message in response to a more protracted bout of risk aversion. This should ultimately leave the USD a buy on dips especially vs low-yielding currencies like the JPY.

JP Morgan

Well I am glad I have been advocating smaller risk, because even that felt like big risk yesterday. Skittish price action, deleveraging of positions and lack of fluid explanation for moves leaves us and the market scratching our heads, and pretty much close to home in terms of risk from here for now. The reality is the USD against the low yielders moved sharply higher in the 48 hours post the Fed, and since then has made little further ground, and where we felt more encouraged to hold currency longs rolled over in almost uniform fashion yesterday with little regard for individual supportive stories.

Whether yesterday was a 24-hour phenomenon or something more sinister, I doubt there’s a huge amount of confidence to fight price action in the very near term. Plenty of questions but not many answers, starting with the euro sell off in the morning being blamed on chatter around the ECB strategic policy review which was spurious at best, price action in oil reversing some of the froth from the lack of OPEC+ agreement and then some growth concerns as services ISM came in lower with some of the internals poor as well. All in all, positions were cleaned across the board from fixed income where outright shorts and steepeners clearly were still very large to high beta FX which went along for the ride.