Sat, Dec 04, 2021 @ 17:27 GMT
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FOMC Minutes Show Little Urgency for a March Hike

The US dollar slid yesterday after the minutes from the latest FOMC policy meeting disappointed those who were looking for hints that a March hike is underway. Although Fed officials expressed confidence that a rate increase might be appropriate "fairly soon" if incoming information on the labor market and inflation was in line with or stronger than their current expectations, this was tempered by other comments that showed little concern about near-term inflation risks. Many Fed voters saw only a modest risk of inflation pressures increasing significantly and judged that the Fed would have "ample time" to respond if inflation emerged. On top of that, several members continued to be concerned about the downside risks to economic activity associated with further appreciation of the dollar. With regards to Trump’s fiscal promises, policymakers noted that the uncertainty surrounding the subject should not deter the Committee form taking further steps in removing policy accommodation. Nevertheless, some were mindful that adjusting policy in anticipation to these policies might have different consequences than currently anticipated. All these points combined passed a different message to market participants than the one they got from Yellen’s testimony last week. As such, the dollar weakened and the probability for a March action has ticked down. According to our model, which is based on the yields of the Fed funds futures, that probability is now 26% versus 28% yesterday.

Due to the fact that the meeting statement was relatively balanced, we did not expect this level of hesitation in these minutes. Nonetheless, the outcome confirms our assessment that the Committee has turned more dovish this year through the rotation of voting rights. As such, we stick to our guns that a March hike is unlikely and that the next increase in interest rates will probably take place in June. We would like to see some clarity around fiscal reform, some acceleration in wage growth, as well as an uptick in the core PCE price index rate, before we reconsider this view.

USD/JPY slid as soon as the minutes were out to challenge once again the 113.00 (S1) support territory. If USD-bears remain in charge today and manage to break that barrier, then we expect them to aim for our next support of 112.60 (S2), defined by the low of the 17th of February. However, although there is the possibility for further declines, the short-term path of the pair remains sideways. The rate has been oscillating between 111.60 and 115.50 since the 11th of January. We would like to see an escape from that range before we assume a forthcoming trending direction.

French politics still on the spotlight

Yesterday, Veteran French centrist Francois Bayrou announced that he will not run for President and offered his support to the independent candidate Emmanuel Macron. According to the polls, Bayrou’s support was only 5%, but his withdrawal gives Macron a significant boost towards victory. EUR/USD spiked higher on the news, after it hit support near the 1.0500 (S1) territory, got another boost later in the day from the Fed minutes, and stopped near the 1.0570 (R1) line. Anything that reduces, or at least not increases, the possibility of Le Pen becoming President is seen as positive for the common currency. The combination of that and the disappointment from the Fed minutes may keep EUR/USD supported for a while. A break above 1.0570 (R1) is possible to challenge our next resistance of 1.0600 (R2). Nevertheless, we don’t expect any further recovery to develop into a strong bull run, given that we still have a long way to go before any election outcome is certain. A fresh poll showed that Marine Le Pen has increased her lead in the first round, which proves that Europe’s political risks have nothing but diminished. However, the common currency did not react to that poll, as the far right leader is still expected to lose by a large margin in the runoff. With this uncertainty still in place, we expect euro-bears to take charge again soon and drive the battle in EUR/USD back down for another test near 1.0500 (S1). However, we recall that one of our favorite proxies to play further weakness in the common currency is EUR/JPY, given that the yen may enjoy some safe haven flows in case uncertainty mounts further.

Overnight, Australia’s capital expenditure index for Q4 tumbled 2.1% qoq, much more than the expected 1.0% qoq slide. The Aussie slid on the release, but that doesn’t change our outlook with regards to the currency. The RBA’s intention to remain on hold in the foreseeable future combined with the surge in iron ore in past months are likely to keep the AUD supported. As we noted yesterday, we believe that EUR/AUD is one of the better proxies for exploiting any further Aussie gains, considering that the political risks in Eurozone could keep the euro on the back foot in coming months.

As for today’s events

During the European day, we have a relatively light calendar in terms of economic releases. From Germany, we get the final GDP figures for Q4 as well as the Gfk consumer sentiment index for March, though neither of these indicators is usually a major market mover.

In Norway, the oil investment expectations survey for Q1 is due to be released, though no forecast is available for the figure. Considering the nation’s heavy reliance on oil exports, this number will be closely watched. We see the case for oil investment expectations to have risen from the previous quarter, given that oil prices have remained elevated in recent months, following the OPEC consensus. Something like that may bring NOK under renewed buying interest.

From the US, we get initial jobless claims for the week ended 17th of February. The forecast is for the figure to have ticked up, something that would bring the 4-week average down.

We have two speakers scheduled on Thursday: ECB Executive Board member Peter Praet and Atlanta Fed President Dennis Lockhart.

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