US: Final days of Fed speakers could be key - MUFG

Derek Halpenny, European Head of GMR at MUFG, notes that the EUR/USD rate advanced further in the aftermath of the unchanged monetary stance but the dollar rebounded from the low of 1.1327 with market participants perhaps still not entirely convinced of the outcome of the upcoming Fed monetary policy meeting on 21st September.

Key Quotes

“We are approaching the blackout period but prior to that we have a number of speakers – Boston Fed President Rosengren and Dallas Fed President Kaplan speak today; Atlanta Fed President Lockhart, Minneapolis Fed President Kashkari and Governor Brainard then all speak on Monday. Rosengren is a voting Fed president while of course Governor Brainard will vote as well and hence their comments will be key for the markets.

Interestingly, when Rosengren, a dove, last spoke on 31st August he expressed some reservations about potential risks for the financial markets from leaving rates too low for too long. He warned of a potential point arriving where a trade-off would be required between increased economic costs from a rate hike and the benefits of continued financial market stability. Rosengren specifically mentioned commercial real estate as a real concern. So it will be interesting to hear from Rosengren today given these recent comments. A repeat of these concerns would raise expectations that he might be in favour of a September move.

But perhaps it will be Brainard’s speech on Monday that could prove more important. Known as one of the most dovish FOMC members, any indication from her that September is in play would have a meaningful impact on lifting market expectations toward a rate hike on 21st September. Monday is the final day before the blackout period begins and we have stated before that the FOMC would like to have the rate hike probability higher if there is a desire to move this month. Governor Brainard provides the perfect opportunity to do just that. Brainard has not been vocal of late but in her last speech on 3rd June (ahead of June FOMC) she called for patience and for the Fed to wait arguing that the neutral rate of fed funds was perhaps considerably lower than previously thought.

Her speech on Monday (18:15 BST) to the Chicago Council of Global Affairs is on the US economy and monetary policy. It seems this speech has been scheduled late on although it is not clear exactly when. We suspect the dollar selling may well be contained for now ahead of that speech. If Rosengren is more hawkish today we may well see the dollar rebound somewhat on increased speculation the FOMC is trying to position the market for a hike with Brainard potentially adding to that on Monday.”