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Analysts at Nordea Markets suggest that while we can read the Fed’s tolerance towards overshooting on inflation as dovish news,  the primary reason behind the dovish shift in the fed funds pricing in the aftermath of the minutes was the comment on a potential 20 bp hike in the IOER rate instead of a 25 bp hike.

Key Quotes

“The re-pricing of the front of the Fed Funds curve was much more about technicalities than actual dovish policy signals.  Something that was misinterpreted by many commentators – and likely also the reason why the USD did not react negatively to the minutes.”

“The FOMC mentioned the word “symmetrical” eleven times in the minutes, indicating that they are willing to tolerate overshooting inflation short term.  However, we don’t consider this a particularly dovish policy signal, but rather see it as prudent risk management from the Fed.  As the Fed is obviously not in control of short-term fluctuations in inflation, the FOMC has simply adjusted the language to minimise the negative market impact of the almost certain overshooting inflation.”

“And while this symmetrical inflation focus from the FOMC may sound USD negative at first glance,  it is not necessarily bad news for the USD. Since 2016, periods of relative steepening of the USD curve versus the EUR curve have coincided with a stronger USD, as a steeper USD curve invites partially FX hedged international bond flows into US.”

“Our  bottom line is that tolerance towards inflation could prove temporarily USD positive via a relative steepening of the USD curve.  Recently, the core inflation spread widening between the US and Japan, the UK and the Euro area has been a key driver of the USD gaining versus most peers.”