Market doubts September hike, leading to continued USD weakness

Despite overall robust US data the USD continued to depreciate yesterday. The FOMC minutes have created too much uncertainty on the markets. By now, a majority of market participants regard a rate hike in September as unlikely. One has to weigh two things though. On the one hand, the FOMC statement after the July meeting said clearly that the Fed governors will regard a normalisation of monetary policy as appropriate once "some" further improvement in the labour market is visible. And the labour market report for July probably showed just that, at least in terms of employment growth. 

The FOMC is also worried about low inflation. Their assumption that a tighter labour market would lead to higher wages and, in the medium term, to an acceleration in consumer price inflation has not panned out so far. 

"In all probability, the labour market report for August will be decisive. If it shows not only robust employment growth, but also rising wage growth, the FOMC will be more confident that the inflation target will be reached within the foreseeable future. Until then, we will still be in for several volatile weeks, during which the markets will ponder the pros and cons for a rate hike in September every time the FOMC members say something or data are released", states Commerzbank.