According to yesterday’s FOMC several participants argued for proceeding cautiously in reducing monetary policy accommodation "because they saw the risks to the U.S. economy stemming from developments abroad as tilted to the downside or because they were concerned that longer-term inflation expectations might be slipping lower, skewing the risks to the outlook for inflation to the downside,". It must be noted too that several members stressed that there is little room to ease monetary policy further through conventional means if needed. If anything the minutes more or less confirm that there is little scope of the Fed tightening monetary policy as soon as this month.
However, as such prospects are already fully priced in we see limited room of falling monetary policy expectations to the detriment of the USD. If anything we stick to the view that the currency should be bought against higher yielders such as the AUD and CAD.
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This is especially true as in an environment of capped global growth momentum and limited room of further falling Fed rate expectations investors’ appetite for risk assets should stay muted. As such we do not expect the most recent improvement in sentiment to last. It must be remembered too that our FX risk index remains in risk averse territory, which indicates that caution remains warranted.