Dollar Hollar: FOMC Minutes Frustrate USD Bulls

Dollar Hollar: FOMC Minutes Frustrate USD Bulls

The January FOMC minutes frustrate USD bulls. The minutes were a bit dated in light of Chair Yellen’s more recent Congressional testimony. Market participants were most interested in the implications of market turbulence for the balance of risks and the likely rate path trajectory, having cut odds of a rate hike this year to about 30%.

Fundamental Flows

The January FOMC Minutes showed a committee confused by recent data developments, tighter financial market conditions and the impact on the medium term outlook from China and other EMs. These developments obscured the balance of risks to the FOMC’s outlook. On one thing they were clear; uncertainty has increased.

Fed officials noted continued improvements in labour markets; however, recent measures of household spending and production disappointed. The impact on inflation from lower oil and non oil imported goods prices was discussed. Most continue to see the disinflationary effects as transitory and counted on continued strength in labour markets and well-anchored inflation expectations to support a rise in inflation to the two percent objective over the medium term. However, “a number of participants indicated that, in light of recent developments, they viewed the outlook for inflation as somewhat more uncertain or saw the risks as being to the downside.” Moreover, “a couple of members emphasized that direct evidence that inflation was rising toward 2 percent would be an important element of their assessments of the appropriate timing of further policy firming.” This suggests that a couple of voting members are likely to support unchanged policy for a while.

Almost all participants saw evidence of tighter financial conditions, including; “declines in equity prices, a widening in credit spreads, a further rise in the exchange value of the dollar, and an increase in financial market volatility.” “The effects of these financial developments, if they were to persist, may be roughly equivalent to those from further firming in monetary policy”, the minutes noted, amplifying the downside risk.

Tighter financial conditions as well as the possibility of a significant weakening in growth in China and other EMEs could potentially further restrain US domestic economic growth. “Participants judged that the overall implication of these developments for the outlook for domestic economic activity was unclear, but they agreed that uncertainty had increased, and many saw these developments as increasing the downside risks to the outlook.”

The minutes, while maintaining the “wait and see” data-dependent approach amply highlight the downside risks to the policy outlook. Combined with post-meeting comments from Chair Yellen and other Fed policymakers, the minutes argue for policymaker caution when moving forward with rate normalization. Markets continue to expect no change in policy rates before mid-year and downward revisions to the expected policy rate path in the FOMC’s March Summary of Economic Projections.

Technical & Trading Takeaway


A failure at the apex of the consolidation suggests we test bids at 94.50 next, this would be a decidedly bearish development and as such I would not be looking to buy this test lower I would wait for a corrective upside reaction to test the apex from below where I would look to establish bearish USD exposure as per the chart above.

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