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Key highlights on the latest Fed Minutes

Odds for a September rate move dropped after the Fed minutes suggested that conditions for a hike needed further evidence from further increases in inflation. The key paragraph worth highlighting from the minutes is as below: “Most judged that the conditions for policy firming have not yet been achieved, but they noted that conditions were approaching that point. Participants observed that the labour market had improved notably since early this year, but many saw scope for some further improvement.” With these minutes ‘penned’ before last week’s Yuan devaluation, and the global rout on Oil - both factors that would bring inflationary pressures down further - odds for a Fed rate move on September did narrow down to 37% versus 50% earlier that day. As recent as early August, the odds for a September hike were as high as 75%. Attention has now shifted to a focus on the December meeting with a 65% calling for a move then. Point to note that whilst there is an official meeting scheduled on 27-28 October, bets for an October move is less popular due to the lack of an accompanying press conference that would follow the meeting. Furthermore, December is traditionally not the ‘preferred’ time for the Fed to move as general market liquidity is lighter during the year-end holiday season. With the ‘window’ for a Fed move this year closing, we may eventually see the move deferred all the way till 2016. The Dollar Index or DXY correspondingly sold down, with strength seen on major dollar pairs including the AUD/USD and EUR/USD. Even the CAD/USD managed a rebound after its initial thumping dragged down by a new low on the price of Crude. The charts below show the EUR/USD punching through its 50-day MA last night. If this dollar pair is able to break above last week’s high of 1.1220, we may see a test of the 200-day MA at 1.1335. Should this happen, this would be the first in more than a year that the 200-day MA would be tested. Conversely, first support for the Eurodollar would be the 1.108 level or 50-day MA. It’s also interesting to note that even as the eurodollar firmed overnight, ‘bears’ continued to add to short positions here (according to CMC Markets Client Sentiment Indicator), betting that the weight of the ECB’s aggressive QE program will keep any bounce on the Euro in check.



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