Fed in no hurry to hike its key rate - Commerzbank

With major central banks silent at the moment, the market is looking at economic data to gain hints about the Fed’s further interest rate path, said Antje Praefcke, analyst at Commerzbank. However, these are unlikely to drive hopes of an imminent rate hike in coming days. “The dollar will thus consolidate for now.”

Key Quotes

“All major central banks are on their summer break now. Consequently, all is silent, with no official speeches or testimonies on the agenda. The market is thus lacking concrete hints from officials about the future interest rate path of the Federal Reserve. Hence, the only thing left to do is look at economic data. Apart from a surprisingly healthy July labour market report, data have not been convincing of late. In particular US growth, but also inflation, came in disappointing. The Fed should thus be in no hurry to hike its key rate swiftly. It has sufficient arguments at hand to stick to its cautious stance. Forthcoming data are unlikely to change the picture next week.”

“The inflation rate will signal no more than a very slow increase in US inflation pressure. The minutes of the last FOMC meeting in late July should support the assessment that the bar for a further interest rate hike remains high. Consequently, the dollar will have little scope for major gains as the likelihood of a Fed rate step by year-end priced into the market is less than 50% and doubts about a rate hike next year are back on the rise.”

“For this view to be altered, US data would have to deliver a significantly positive surprise. However, with the market’s rate expectations repeatedly proving wrong, we are more likely to see dollar weakness if the outcome were to fall short of market expectations. Overall, the summer consolidation phase with the dollar trading sideways should remain intact.”