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"The minutes from the July FOMC meeting were less hawkish than the market feared as the Committee was divided on the need for another interest rate hike. It's important to remember that the decision to act will ultimately rest with Yellen and that there will be no rate hike until she believes a rate hike is warranted. As our economic desk strategists not some participants stressed that the Committee needed to consider the constraints on the conduct of monetary policy associated with proximity to the effective lower bound on short-term interest rates. In their view, the "some" participants noted above almost certainly includes Yellen. She seems to be sticking to her risk management policy approach and feels little urgency to raise rates. However, the minutes pre-date the strong July US employment report. Dudley appeared to want to stress this in his comments this week.
So could Yellen reinforce Dudley's comments at Jackson-Hole on Friday? We think not. It's an academic conference that concentrates on long-term themes and has in recent years moved away from short-term policy signals. The tone may therefore reflect recent comments from Powell/Williams about low productivity growth and low neutral rates. But Yellen talking about lower long-term rates isn't the same as dampening expectations of a near-term rate increase.
We therefore still believe risk/reward favours USD upside against the EUR, GBP and JPY. Discussions about lower terminal rates should ensure that EM FX out-performs the G4 currencies".
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