The FOMC monetary policy announcement has been marginally dovish and the market is putting pressure back on the dollar. No rate changes, no announcement of the beginning of balance sheet normalisation, and all expected. Just the slightest changes to the FOMC statement with a nod to the recent inflation disappointments and a comment on the balance sheet.
The statement contained few surprises:
- Inflation will be “below two percent”, removing the “somewhat” from the June statement, arguably suggesting it is more solidly below?
- Balance sheet normalisation will begin “relatively soon” and is dependent on the economy evolving as expected.
- The vote was unanimous.
What does this mean?
Not much has changed. The balance sheet comment is a nod to September but “relatively soon” by no means guarantees it. Nailed on September would have surely been just “soon”. This statement does nothing to improve the prospects of a December rate hike due to the marginally dovish comment on inflation.
Market reaction has been dovish and hitting the dollar:
- EUR/USD has bounced +50 pips
- GBP/USD has bounced +40 pips
- USD/JPY is lower by 50 pips
- Gold is $5 higher.
The dollar weakness remains on course and there is little that could change this now until perhaps the Jackson Hole economic symposium at the end of August. There are likely to be bumps along the way but as long as inflation remains subdued and wage growth minimal then the dollar will remain under pressure. The Bund/Treasury spread continues to be a driver of EUR/USD higher.