There is going to be a great deal of commentary between now and the next FOMC meeting on September 17 and 18. The commentary began before the minutes were released Wednesday and is just going to escalate. Will the Fed taper QE or will they not taper QE? The short reading is that the Fed minutes did nothing to dissuade the argument that the U.S. central bank will begin tapering in September. As long as the economic data is in line with a steady recovery, expectations for the Fed acting will not be derailed and perhaps those expectations may even be fulfilled in September.
The big risk is the U.S jobs number on September 6. Without jobs growth, the Fed is likely to hold off. So if that number is at least in line with expectations, if not better, the Fed is indeed likely to taper all other things being equal. Bernanke has ebbed and flowed in his commentary but the big signals were not that ambiguous. Which leads to the question of how much? The consensus is for a cut of $15 billion in the current $85 billion a month in asset purchases with the outside expectation at a reduction of $20 billion a month. That could see a complete end to QE and the long awaited normalization to Fed policy sometime in 2014.
FX investors though, remain narrowly focused on what the Fed will do or not do in September. If tapering expectations mount on a good jobs number on the 6th of next month, the dollar will strengthen considerably in the lead up to the meeting. The risk of course, is that the jobs number will be good, the dollar rallies and the Fed does nothing in September. But even that should be a knee-jerk sell-off and bullish dollar positions will mount again through to the October meeting. There are ways to hedge for that risk but any dip should be short and an investor is likely to make any loss back in days this time round. If the Fed does taper, the immediate trading reaction higher in the dollar will be equally as swift. The dollar faces some headwinds but nothing seems too much of an impediment at this point.