06/07/2017 - FED On Course For Rate Hike Despite Concerns Over Inflation

USD

The dollar inched up on Wednesday against a basket of currencies as traders awaited the release of the Federal Reserve's minutes on its June policy meeting which may hold more clues on its plan to possibly reduce its balance sheet later this year.

The details of the meeting, at which the U.S. central bank voted to raise interest rates, also showed that several officials wanted to announce a start to the process of reducing the Fed's large portfolio of Treasury bonds and mortgage-backed securities by the end of August but others wanted to wait until later in the year.

Federal Reserve policymakers were increasingly split on the outlook for inflation and how it might affect the future pace of interest rate rises, according to the minutes of the Fed's last policy meeting on June 13-14 released on Wednesday. The committee questioned why financial conditions had not tightened despite recent rate rises and a few said equity prices were elevated.

Last month's 8-1 vote to lift the benchmark interest rate another quarter percentage point, its second this year, signaled the Fed's confidence in a growing U.S. economy and the eventual inflationary effects of low unemployment. In a press conference at the time, Fed Chair Janet Yellen described a recent decline in inflation as temporary and the central bank kept its forecast of one more rate rise this year and three the next.

As U.S. price growth has weakened and remained below the Fed's 2 percent inflation goal, some traders have piled on bets for the dollar to fall. However, bearish bets on the greenback rose in late June as the European Central Bank and Bank of England hinted they might consider scaling back monetary stimulus later this year.

GBP

Sterling dipped on Wednesday as a reading of Britain's services sector added to a string of weak-looking surveys and data that could deter the Bank of England from raising record-low interest rates for the first time in ten years.

A number of the Bank policymakers, including BoE Governor Mark Carney, have spoken in favour of soon reversing last year's interest rate cut, which followed the shock Brexit vote. The hawkish remarks have helped the pound to reverse its 2 percent drop against the dollar, in response to a snap election on June 8 which left no party with a clear majority. However, readings of Britain's economy as it negotiates its exit from the European Union could add to arguments against lifting rates too soon, despite inflation soaring past the Bank's 2 percent target.

Political instability has also been cited as a risk for sterling by analysts, some attributing June's weak PMI surveys to the uncertainty surrounding Britain's election results in June. Prime Minister Theresa May has faced calls to quit from within and outside her ruling Conservative Party since the election and has struggled to unite her government on policy and to assemble a new team of aides.

Key Announcements 

13.15 – USD – ADP Non-Farm Employment Change; Forecast at 184k against a previous of 253k

16.00 – USD – Crude Oil Inventories; Forecast at -2.4M against a previous of 0.1M