The FOMC minutes should prove to be more interesting after the FOMC surprised on the hawkish side in their October statement. But the minutes will more likely reflect the myriad of views on the FOMC than the October statement did.
We can glean from the October statement that the Fed has become more positive on the outlook for the labour market amid continued improvement in a broad array of measures, even if only incrementally so. References to this change in tone, as a result, will likely be well anticipated. The consensus view, via the October statement, also thought it unnecessary to include references to evolving risks to global growth, heightened market volatility, or the stronger USD in the statement.
But it is very likely these issues were debated and discussed, and that should be reflected in the minutes. The market shouldn’t view this as particularly see this as particularly surprising, it may add a doveish tinge to the minutes relative to the hawkish statement.
The committee likely weighed the pros and cons surrounding downside risks to global growth and a stronger US dollar, but anticipated that US growth was likely to hold up due to a boost in real income and consumption. The market anticipates members to look past near-term declines in headline inflation due to lower oil prices and continue to view long-term inflation expectations as remaining stable.
However, the overall tone of the minutes should be broadly consistent with the Fed gradually shifting towards tightening monetary policy next year which will ultimately support a stronger US dollar.
From a trading perspective according to the latest COT positioning data the market appears positioned for the USD to continue to outperform in coming weeks, especially against the EUR and JPY.
Key to watch USD crosses into the FOMC. Our preferred USD play right now is the USDCAD as it tests key trendline support, if the FED maintains its hawkish stance I would anticipate my Key Trade from the Morning Report to run on, one to keep any eye on in the post market reaction to the minutes along with the key technicals in the majors EURUSD, USDJPY and GBPUSD as mentioned in Sam’s morning video.
Trader Tip: Here at LFX a useful tool we like to take advantage if for a quick perspective of Feds Fund Rates forecasts is the CME group’s Interest Rates Implied Probability product, this tool gives a great read on the markets perspective of the likelihood of Fed Funds rates and actions over the next 12 months.