Global macro overview for 17/08/2017

Global macro overview for 17/08/2017:

The FOMC Meeting Minutes revealed policy makers debate regarding inflation, asset prices and financial stability. According to the minutes, most Fed members believe inflation may remain below 2.0% longer than initially expected. The additional risk prevails for a further decrease, but the Committee could afford to be patient in deciding whether to increase interest rates further despite the weak inflation. On the other hand, a delay in raising the interest rates might intensify financial stability risks (some members even pointed out, that high equity prices might be that risk). Despite all this, in the next few years, inflation should be on the projected target. Most policy makers backed the balance sheet at the next meeting, although they say they will only contribute little to monetary tightening.

Overall the meeting did not reveal anything new and the ongoing debate, whether the current weakness of US inflation is transitory or transitional had been noted in the previous statements. It is worth to notice, that there are clearly two camps within the committee: those that prefer a wait-and-see policy approach due to the uncertain inflation outlook and those that are happy to rely on traditional macro relationships like diminishing spare capacity (or above-trend growth) generating higher future inflation. This is why an option to reduce the balance sheet in September and then a small rate hike in December is still on the table. This scenario would, in turn, strengthened the US Dollar across the board for a short-term.

Let's now take a look at the US Dollar Index technical situation after the news release. The US Dollar bulls were too weak to violate the key technical resistance zone around the level of 94.11 and after the FOMC statement, the price moved lower towards the next support at the level of 93.25. The overall market conditions are overbought, so the price might test the lower channel boundary around the level of 93.00 before any bounce higher.

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