FOMC Minutes Show Growing Rate Cut Support

Last night’s FOMC minutes delivered on the dovish side as expected. The minute showed that several members were in favour of a cut last month while the ‘vast majority’ agreed on cutting rates in September as appropriate.  Additionally, where inflation had previously been the main focus point for discussions, this time around, concerns were focused on the employment side of the Fed’s dual mandate. This was particularly noteworthy given that data earlier in the day showed that Q1 payrolls had been revised lower by 818k, reflecting greater weakness in the jobs market than previously thought.

Dovish Fed Pricing Shift

Market pricing for September is now showing a 67% - 33% split for a rate cut of .25% or .5% respectively. This pricing has grown increasingly dovish over the last week or so, informed by weaker inflation and jobs market data. Beyond September, at least one further .25% cut is priced in this year. However, if data continues to track current trajectory, this could well move to include a 3rd rate cut this year.

Powell in Focus Next

The focus now turns to Fed’s Powell who speaks at Jackson Hole tomorrow. On the back of recent jobs and inflation data undershooting forecasts, and with the FOMC minutes showing a clear dovish shift at the Fed, traders are now widely expecting Powell to cement these dovish expectations, creating room for a fresh move higher across risk markets while exposing USD to fresh downside.

Technical Views

DXY

The Dollar Index is now testing support at the 100.93 level. With the index down sharply from the July highs around the 106.00 level, some consolidation and recovery cannot be ruled out. However, while price holds below the 102.46 level and the broken bull trend line, focus is on a further push lower with 99.67 the next support to note.