Danske Research discusses its expectations for the Fed policy trajectory in light of yesterday's FOMC minutes from the April meeting.
"Yesterday, equity sentiment was generally on the back foot yesterday and this spilled well in to FX - and other assets. As we are at somewhat high levels of EUR/USD, the change in risk sentiment also led EUR/USD lower, supported by marginally hawkish FOMC minutes. The most important takeaway from the FOMC minutes was that the Fed may only be a few meetings away from starting discussing "a plan for adjusting the pace of asset purchases", assuming the economy continued to make rapid progress. We still expect a shift in rhetoric at the September meeting, as the Fed by then has seen several (in our view strong) jobs reports," Danske notes.
"All in all, the current weakness markets is quite reminiscent of what we saw ahead of PMIs last month, the new set of which is due this Friday and may not amount to more than nervousness, once we see PMIs. Looking ahead though, we continue to expect manufacturing PMIs will be peaking out during these months (and at some point, that Fed will turn more hawkish); and for both of these factors to add up to a stronger dollar, eventually," Danske adds.