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Fed Downplays Yield Curve Control, US Dollar Bounce, But For How Long?

Fed Downplays Yield Curve Control, US Dollar Bounce, But For How Long?

Justin McQueen, Strategist

US Dollar Price Analysis & News

  • Fed Minutes: Giving Little Away Provides US Dollar Bounce
  • Most FOMC Members Do Not See YCC As Appropriate For Now
  • US Dollar Bounce, But for How Long?

Fed Minutes: Giving Little Away Provides US Dollar Bounce

Risk appetite has taken a slight hit with the US Dollar underpinned following the lack of policy hints in the FOMC minutes. As such, failing to provide enough dovish signals to drip feed the equity market rally. However, with the meeting minutes 3-weeks out of date and given the changes observed in the market (most notably the bond market), we suspect the Jackson Hole Symposium (August 27-28) will be of greater importance ahead of a monetary policy strategy announcement at the September meeting.

Most FOMC Members Do Not See YCC As Appropriate For Now

Yield Curve Control: Perhaps the important point from the minutes had been that “Many participants judged that yield caps and targets were not warranted in the current environment”. This suggests that the adoption of YCC will not come as early as market participants may have expected and thus the Fed appears to take a more reactive stance (i.e. bond market sell-off before guidance on YCC). The caveat to add here is that when the FOMC mentioned the current environment, bond yields had been heading lower with the yield curve also flattening. However, since the Fed meeting, 10yr yields have risen 10bps with the 2s30s curve steepening 15bps.

Fed Downplays Yield Curve Control, US Dollar Bounce, But For How Long?

Source: Refinitiv

Monetary Policy Framework Review: With regard to the framework of tweaking forward guidance, a number of Fed officials stated that a revision to longer-run objectives will be very helpful in guiding future policy decisions. In turn, this will be the key focus going forward with a potential teaser at the Jackson Hole Symposium ahead of the September meeting.

US Dollar Bounce, But for How Long?

Overall, the FOMC minutes provided little in the way of new information, providing a shot in the arm for the US Dollar, which in turn has put the brakes on the rally across the equity space. However, while YCC adoption may not be as close as market participants had expected, the Fed will remain very accommodative and thus the bounce in the greenback may be somewhat short-lived. Importance on the Jackson Hole Symposium has increased, in which, failure to provide clarity on the policy outlook raises the risk of higher yields in the short-term.

US Dollar Outlook: Weekly Time Frame

Fed Downplays Yield Curve Control, US Dollar Bounce, But For How Long?

Source: IG

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