Talking Points:

US Dollar May Rise as July FOMC Minutes Boost September Rate Hike Bets
Yen to Rise, Commodity FX Vulnerable if Fed Outlook Sparks Risk Aversion
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A quiet day on the European economic data front will see investors looking ahead to July’s US CPI figures as well as the publication of minutes from last month’s FOMC meeting. The core year-on-year inflation rate is expected to print at 1.8 percent, unchanged from the prior month. However, US economic news-flow has increasingly tended to outperformed relative to consensus forecasts since mid-May, leaving the door open for an upside surprise.

Meanwhile, the account of the Fed’s July sit-down may foreshadow a rate hike in September. The conspicuous absence of dissent from hawkish FOMC members last month hints that withholding tightening may have been a tactical rather than a qualitative decision.

Analysts tracked by Bloomberg seem to favor “liftoff” in September while Fed Funds futures continue to price it in for October, meaning a move in July would have almost certainly triggered pandemonium. With that in mind, Fed officials may have acknowledged that the economy is ready for stimulus withdrawal but opted to wait for the sake of smoother normalization.

Clues to that effect may help cement September as the consensus time frame and force investors to re-price expectations baked into asset prices, boosting the US Dollar. It ma likewise weigh on risk appetite as traders consider the pivotal role of expansionary monetary policy in fueling the post-crisis recovery in financial markets, punishing sentiment-geared currencies like the Australian, Canadian and New Zealand Dollarswhile offering a lift to the Japanese Yen. Needless to say, a stronger CPI print would only encourage this process.

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