US Dollar: Range-bound trading as FOMC minutes loom – ING

ING’s Chris Turner notes that the Dollar remains supported by higher energy prices and long-end US yields, but FX volatility is still low, favouring carry trades. He expects the July FOMC minutes to show a less hawkish Federal Reserve than implied by prior Dot Plots, with upcoming CPI, jobs data and Jackson Hole more decisive. ING’s base case is no September hike and a slightly softer Dollar, with DXY confined to a tight range and USD/JPY options pricing minimal movement.

Dollar steady before FOMC minutes

"The unresolved conflict in the Middle East is keeping energy prices bid and partially contributing to the rise in long-end yields. Longer-dated US Treasuries actually found a little demand on yields above 5.30% yesterday, but risks still look skewed to the upside here."

"Higher rates have taken a little steam out of the growth stocks, but a 5% drop in the Philadelphia Semiconductor index yesterday looks small beer in comparison to daily swings seen so far this year. As yet, we see no grounds for a fundamental shift in the low volatility environment which favours the carry trade."

"For today, the focus will be on tonight's release of the FOMC minutes for the July meeting. Recall that the vote was 9-3 for unchanged rates and the event proved a dovish one for the short end of the US curve and the dollar, while the long end sold off."

"The suspicion is that the 12-member FOMC is less hawkish than the participants whose projections delivered forecasts of a 9:9 split for a hike in the June set of Dot Plots. So while there may be a few hawkish references in tonight's minutes that could nudge the dollar and short-dated rates a little firmer, we do not see the minutes as a game changer."

"Instead, another batch of CPI and jobs data, plus the end-of-month Jackson Hole symposium, will have a bigger say in whether the Federal Reserve hikes in September. Our base case is that it does not, and the dollar softens a little."

"Expect more narrow range trading in DXY – perhaps in a 99.40-99.80 range. One-day FX option straddles in USD/JPY price just a 28 USD pip range for the next 24 hours."