Less certainty on September Fed hike

The July FOMC statement highlighted the bar for hikes is not high with the Committee only need to see "some further improvement in labor market improvement" before they will be comfortable raising rates. However, uncertainty was injected into how low the bar actually was in the Minutes from the meeting with a seemingly more pervasiveconcern about low inflation and seeing the conditions necessary to reach their 2% inflation goal. 

"With Sep hike probability lower, alongside mixed data, the dollar rally will be more choppy near-term. It is now seen that the curve is steepening in the near-term. Given the dollar's positive correlation with a flatter yield curve, this poses some risk for the USD", says Bank of America. 

But, it's not just about the US, relative curves matter for the dollar. With the global rates forecasts seeing a steepening of major swap curves through mid- 2016, while the US curve will remain relatively stable, this reduces the risk for the USD particularly once the Fed start tightening. A continued USD rally (albeit choppy one) is consistent with our analysis that the trade weighted dollar has yet to price Fed hikes.

"According to the analysis, roughly 3% of the 14% rise in the trade-weighted dollar over the past year is due to Fed expectations. The rest is due to growth shocks likely emblematic of US decoupling (e.g. China, ECB QE)", added Bank of America.