USD: More Fed speak ahead of Jackson Hole - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar continues to trade on a softer footing in the near-term as market participants remain comfortable that the Fed is in no hurry to resume rate hikes this year.

Key Quotes

“The warning from Fed Vice Chair Dudley earlier this week that investors are too complacent over the likelihood of further rate hikes has largely been ignored. The Fed’s failure to follow through with earlier plans for rate hikes is likely contributing to the market’s indifference. Market expectations will likely only change materially when the Fed begins to follow up their words with action which would provide a more favourable trading environment for the US dollar. Stronger economic growth in the second half of this year should make the Fed more confident about resuming gradual rate hikes alongside still solid employment growth.   

However until here is stronger guidance over the timing of the next Fed rate hike, the US dollar will remain on a softer footing even if weakness already appears to be overshooting yield spreads. It was again evident overnight when the US dollar failed to derive much support from comments from San Francisco Fed President Williams stating that the Fed should resume rate hikes “sooner rather than later”. Any guidance from Fed Chair Yellen at Jackson Hole would prove more important for US dollar performance.”