As broadly expected, FOMC members decided to leave monetary policy unchanged, maintaining the target range for the federal funds rate to 1% to 1.25% and not providing a clear timing about its balance sheet reduction plan. Little changes were made to the statement compared to the June version. The Federal Reserve acknowledged that inflation measures have declined and are now running below the 2% target. Most importantly, changes were made to the expected start of the balance sheet normalization program. In June statement, the Fed expected the program to be launched this year and it expects to be implemented “relatively soon”. Does the market has to worry about such a change?
From our standpoint, we think this is definitely a dovish adjustment to the statement as it removes clarity regarding the timing, giving more room to start the balance sheet run off. In reaction to this dovish modification, the US dollar was heavily sold off yesterday amid the release. The dollar index fell another 1.10% to 93.15, the lowest level since mid-June last year. Higher yielding currencies were the big winners with the New Zealand and Australian dollar rising 1.60% and 1.15% respectively.
A fresh batch of US data is due for release later today. Initial jobless claims should come in at 1960k versus 1977k a week ago. More importantly, after shrinking two months in a row, durable goods orders should have risen 3.7%m/m in June. Excluding transportation, the indicators should rise by 0.4%m/m compared to 0.3% in July.
After months of lacklustre data, investors have a real need to see some solid and uninterrupted flow of encouraging data from the US. This only under these conditions that we’ll see a bounce back of the US dollar and the pursuit of recovery in US yields.
By Arnaud Masset