The minutes of the Fed’s June meeting frustrated investors, showing that FOMC officials could not find a common ground in working out an accommodation path in order to mitigate the effects of policy changes on the economy. The timing of shrinking the balance sheet, i.e. reducing cash injections into the economy through OMO, remained unclear, triggering a dollar selloff.

The dovish tone of the minutes did not come as a surprise, given that the key inflation indicator (Core PCE) came in at 1.4% in May, lagging significantly behind the target level of 2%. By reducing monetary support to the economy, the Fed risks to stifle the growth momentum, but on the flip side, excessive strengthening of the labour market, higher consumer expectations and recovery of the world economy could lead to an inflation breakout, causing the concern of several Fed members.  Such a scenario would be very likely in the event of a stable recovery of the oil market, which is the main engine of inflationary processes, but forecasts of a continuing glut draw a gloomy picture of energy resources.

It became clear from the minutes that the Fed’s “hawks” propose to limit reinvestment policy in the next few months, while dovish representatives propose to wait until the end of the year. It is unlikely that the Fed will simultaneously announce an increase in the discount rate and a reduction in the balance of assets to avoid a shock in the markets, given the propensity of “gradual” changes in policy. Disagreements between officials also surfaced when discussing whether the labour market should maintain a small gap (“undershoot”) from the target level in order to avoid sharp uncontrolled inflation spikes. The minutes didn’t include any specifics, whereas the existence of two camps is an evidence that the Fed will be monitoring economic data in the next two months in order to be able to move on to specific statements.

After the optimistic speech of Fed’s Chair that the difficult part is now over, the lack of a coordinated position among the officials has become a real disappointment for the markets. Futures on the dollar declined 0.22% on Thursday, whereas the “battle of bullish statements” between the Fed and the ECB ended in a victory for the latter. The dollar also fell moderately against other major currencies, while ac dollar selloff is likely to persist throughout the day till tomorrow’s NFP report, which could eliminate some of the controversy regarding the labour market.  A positive deviation will probably allow the dollar to quickly trim its losses.

In the oil front, the prices of oil are heading South. So far, there is nothing left for the markets to play out the data on US reserves and the dynamics of drilling. The desperation of OPEC and the reluctance to further cut production shifts the focus of markets to the US. It is unclear whether current prices are comfortable for US oil firms, though last report by Baker Hughes last Friday showed that the number of wells fell for the first time in a few months, albeit by only one unit. Today’s EIA report will show how persistent the US is in an attempt to become an energy power during declining market prices. So far, oil futures remain in positive territory after the API report, but official data may disprove the forecast of the independent organisation.

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