The USD did not derive benefits from the minutes of the June FOMC meeting; moreover, it even fell against the currencies from the G10 amid discussions about the timing to start tapering of the balance. There is an opinion on the market that the Fed will stop reinvesting income in September, as Janet Yellen's contract ends in February, and it would be nice to have some time to evaluate the effectiveness of her actions. Nevertheless, at the last meeting of the Open Market Committee there was a discussion as some members preferred to start tapering the balance in a few months, while others suggested to wait until the end of the year.
The lack of a clear plan caused a blow to the USD; however, we should admit that the minutes have had a lot of positive moments. In particular, most FOMC members highlighted that there were some specific factors, which led to a slowdown in inflation, while some representatives of the Committee noted that the rise in import prices can be accepted as a sign of the regaining the uptrend for PCE. In my opinion, the supporters of the traditional approach in the Fed led the way. They believe that as long as unemployment rate is at the level of 4.3%, you should expect the rise in wages and inflation.
The discussion on the state of financial markets was also of great importance. Some FOMC members stated that the price of shares is overvalued in accordance with some methods of fundamental assessment; Others expressed concern that low volatility could lead to the increase of risks to financial stability. Given current market conditions, the Fed may ignore macro-economic statistics and increase the rate, provoking the rise in the cost of borrowing and correction in stock indices, which is a bullish factor for the USD.
Dynamics of the USD and Dow Jones indices
Source: Trading Economics.
In Europe, representatives of the ECB try to convince investors that the Bank will continue ultra-soft monetary policy. Benoit Kere said that the issue of monetary policy normalization had not been discussed at the last meeting of the Governing Council, and the recent rise in the Euro in response to the "hawkish" rhetoric of Mario Draghi did not have much importance.
It is interesting that although European regulator allegedly does not discuss the issue of QE, in fact, the curtailing of the program may already have started. Analysis of BofA Merrill Lynch, ABM Amro and Citi show that Bundesbank has drastically reduced the volume of asset purchase in the past few months, which may be related to the lack of securities. This lack is currently compensated by Italy and France; however, BofA Merrill Lynch believes that the ECB is obliged to cut the QE to € 40 billion a month from January 2018.
Dynamics of asset purchases within QE
The pair EUR/USD continues to move around important level of 1.134, waiting for the release of the ADP data on the US employment and ISM data on business activity in the non-manufacturing sector. At the same time, investors should keep in mind that the decline in quotes to 1.125-1.1265 will attract new buyers of the Euro.
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