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"Despite the strong July employment report the USD struggled this week. Headline payroll growth was strong, but with the unemployment rate steady, wages stable, and the labor force participation rate ticking up, the report does little to force the Fed's hand and leaves them comfortably on hold for now. The resulting low vol, positive carry environment precipitated a further reduction in USD positioning as 2016 Fed expectations were little changed. For the USD to rally further, we need to see a more consistent trend of upside surprises that convinces the market Fed normalization will continue beyond just one hike. In other words, we need to see a more significant repricing of 2017 and 2018 expectations.
This week's FOMC Minutes could have some impact on market pricing. We expect the Minutes to offer a bit more optimistic assessment of the US economy and global financial conditions, similar to the July statement.
The knee-jerk reaction could see the USD strengthen as this will be viewed on the hawkish side given the USD selloff we have seen since the NFP report. But, a failure by the Fed to signal hikes are imminent and/or a more protracted normalization cycle means the FX market impact is likely to be short-lived".
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