Today we will learn the minutes of the last FOMC meeting. Investors may look for clues in it regarding the timing of tapering and interest rate hikes in the US.
According to some Fed members, inflation may not be temporary, which could mean more decisive action.
Opinions of Fed members
Fed Bank of Atlanta President Raphael Bostic said that this year's rise in inflation is taking longer than expected. Therefore, it cannot be determined that the current price increase is temporary. Meanwhile, according to Fed Vice Chairman Richard Clarida, the conditions required for the Federal Reserve to begin tapering its bond-buying program have been "nearly met" with high inflation and ongoing job growth in the labor market. Federal Reserve Bank of St. Louis President James Bullard, on the other hand, appears to be downplaying the risks posed to economic growth by the delta variant of the coronavirus and favors starting to scale back the central bank's asset purchases next month. - I would support starting the tapering in November, Bullard said, adding that he favors completing the process by the end of the first quarter of next year so that the Fed has the flexibility to raise interest rates if necessary.
How does the dollar exchange rate react?
The Dollar Index rose into 94.5 area on Wednesday, having hit its highest level since September 2020 a day earlier. Investors are still betting that the Fed will announce tapering to begin next month as the economic recovery continues, albeit at a slower pace, and inflationary pressures remain. Looking at the positioning of speculative investors on USD index contracts, we could see that according to CFTC commission data, net long positions are at their highest level in two years.
Hence, we could see that investors are very bullish on USD. This seems to be happening due to inflation expectations and the fact that the Fed will chase this inflation with interest rates. September's Consumer Expectations Survey showed that median inflation expectations over the next 12 months jumped to a record 5.3 percent from 5.2 percent. Inflation expectations over a three-year horizon also rose in August, from 4 to 4.2 percent. The FOMC meeting minutes and US CPI data due to be released later in the day will be closely watched for further clues on the Fed's next steps.
The major currency pair is in the region of 1.1550, consolidating at levels at the lowest since July 2020.
Daniel Kostecki, Conotoxia Ltd. (Forex service)
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