US dollar: will the Fed remain hawkish? (video)

  By Elizaveta Belugina

During the past week US was strong versus almost all major currencies. The only exception was Australian dollar which was very resilient because of the higher demand for riskier assets. 

The data released in the US was pretty upbeat. Housing market releases turned out to be all very positive, and the nation’s manufacturing sector expanded in August at the fastest pace in more than 4 years. Consumer price index increased by 2% from July 2013 – that’s a bit lower compared with June readings. Investors now hope that America will be able to enjoy higher growth with mild inflation and this will encourage demand for higher-yielding assets. The minutes of the Fed’s July meeting turned out to be more hawkish: even the FOMC members admit that the US economy is improving.

Next week there will be more important economic indicators in the United States. The better are the American economic figures, the more confident about raising rates the Fed will become, and, consequently, the sooner the market will expect US central bank to act. On Thursday we’ll find out whether US GDP has really jumped by 4.0% in Q2.

We think that depending on the Fed’s approach there are 2 scenarios for the greenback.

The first scenario is that the Fed’s Chair Yellen adopts a less dovish position. If Yellen agrees that the American labor market looks better now and hints that the Fed may change its forward guidance about the interest rates, traders will eagerly resume USD purchases.

The second scenario is that Yellen counters the hawkish tone of the Fe’s minutes. There already were situations like this in the past. Such outcome will make the market players selling US currency.

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