Dollar Declines as FOMC Minutes Reiterate Data Dependency

  • Market-priced odds for a December rate hike remain near 75%
  • Spanish PM offers Catalonia five days to clarify situation

The dollar dropped toward its daily low after the Federal Reserve’s September meeting minutes revealed that while many Fed officials see another rate hike this year as warranted, many are also concerned that recent low inflation readings might not be completely transitory.

The Bloomberg Dollar Spot Index was down more than 0.2 percent after choppy trading and modest moves followed the release of the minutes. The dollar saw daily declines versus all of its G-10 peers, led by losses versus the euro. The market may see more actionable data Thursday with the release of producer prices and Friday, when consumer inflation and retail sales data will be published.

  • The dollar was already on track for a fourth straight day of declines, its longest streak in a month, amid a drop in Treasury yields and concerns over President Trump’s fiscal proposals, North Korea and China. While Fed policy makers reiterated their data-dependency, a “few” participants thought that additional rate hikes should be deferred until data confirms that the low readings on inflation this year were unlikely to persist
    • The FOMC’s debate on the transitory nature of low inflation puts the “burden of proof” on Friday’s CPI release in order for dollar to gain ground, given that a December hike is largely priced in, said Mark McCormick, an FX strategist at TD
  • Earlier, UST yields dropped after Chicago Fed President Charles Evans told reporters that it’s too soon to decide on a December rate hike; San Francisco Fed President John Williams said in the late afternoon that the U.S. economy has exceeded full employment. Treasury Secretary Mnuchin is said to strongly push Fed Governor Jerome Powell as the next Fed chair, Politico said
  • EUR/USD was trading around a fresh high of 1.1865 after breaching technical resistance at 1.1862 from the Sept. 26 peak. Offers layered between 1.1840/50 slowed EUR gains and further supply is positioned above 1.1870, according to traders in Europe
  • The political situation surrounding Catalonia remains fluid after the region’s president, Carles Puigdemont, said Tuesday that his government will delay a declaration of independence to allow for a period of negotiation. Spain PM Rajoy Wednesday broached the possibility of starting a process that could lead to suspending Catalan’s government after giving Puigdemont five days to clarify whether he declared independence
  • USD/JPY reversed a brief gain to trade around 112.38 after the Fed minutes. A report that North Korea may test some short-range cruise missiles in coming days offered a reminder that tensions with the nuclear state linger in the background. At the same time, regional tensions remained elevated after China warned the U.S. to respect its territory after an American warship sailed close to islands claimed by the country

— With assistance by Katherine Greifeld

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