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USD: what to expect from the Fed?

   Authored by Elizaveta Belugina

During the second week of August US dollar strengthened versus EUR, GBP and JPY, but weakened versus commodity currencies – AUD, NZD and CAD, as well as against gold.

The most important event in the past week in the US was a substantial decline in the retail sales growth. This release encouraged the speculation that the Federal Reserve won’t raise the interest rates earlier than expected and diminished the enthusiasm of the dollar bulls. 

Next week we’ll be able to learn more about the position of the Fed: on Wednesday the central bank will release the minutes of its July meeting and on Thursday and Friday the Fed’s symposium in Jackson Hole will take place. How will this affect the greenback? On the one hand, there were a couple of bullish things in the meeting: firstly, it was said that the probability of low inflation has “somewhat decreased”; secondly, the head of the Philadelphia Fed voted to tighten monetary policy. On the other hand, there is serious dissent in the FOMC, and the minutes will likely reveal that. Many members of the Committee, including Janet Yellen herself, wouldn’t like to hurry with moving away from the policy of low rates. In addition, as the retail sales have shown, US economic data aren’t unambiguously positive.    

A conclusion arises: we shouldn’t expect a powerful advance of the USD for now. The scenario we prefer is that the greenback will firm on Monday-Tuesday, but then return lower after Wednesday. Although fundamentally US economy is currently stronger than the European or Japanese one, the market has already priced in the 4% jump of America’s GDP. Now to continue a confident rally US dollar needs new data and “new news”.

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