- The Fed will release the minutes of the January policy meeting on Wednesday.
- Jerome Powell and co’s discussions surrounding the policy pivot will be scrutinized.
- The US Dollar has been outperforming its major rivals since the beginning of the year.
The Federal Reserve (Fed) will release the minutes of the January policy meeting on Wednesday. Investors will pay close attention to comments regarding the inflation outlook and the possible timing of a policy pivot.
Fed is widely expected to leave the policy rate unchanged in March
Federal Reserve Chairman Jerome Powell said in the post-meeting press conference in January that he doesn’t see a rate cut in March as likely. “If we saw [an] unexpected weakening in the labor market, that would make us cut rates sooner,” Powell further explained. After the January labor market report showed that Nonfarm Payrolls rose by 353,000, investors saw that as a confirmation of a delay in the policy pivot and refrained from pricing in a rate cut in March.
With an interest rate reduction as early as March becoming increasingly unlikely, investors started to assess whether May would be the right time for the Fed to start loosening the policy. However, the recent data from the US showed that the economy expanded at a stronger pace than expected in the fourth quarter and the disinflation process lost momentum at the beginning of the year. The Bureau of Labor Statistics reported that core inflation in the US, as measured by the change in the Core Consumer Price Index (CPI), rose 3.9% in January, matching December’s increase and surpassing analysts’ estimate of 3.7%. Following these developments, the probability of a May rate cut declined toward 30% from above-50% earlier in February, as per the CME FedWatch Tool.
Previewing the January FOMC Minutes “the FOMC’s change of tone between the December and January meetings portrayed a Committee that has welcomed the progress made on inflation, but that would prefer to see further confirmation amid strong activity data,” TD Securities analysts said in a note. “The minutes are likely to unveil further color regarding those discussions, as well as talks around QT tapering.”
When will FOMC Minutes be released and how could it affect the US Dollar?
The Fed will release the minutes of the January policy meeting at 19:00 GMT on Wednesday. The USD Index (DXY), which tracks the USD’s valuation against a basket of six major currencies, rose more than 2% in January and it’s up 0.65% so far in February.
The market positioning suggests that the USD has more room on the upside if FOMC Minutes feed into expectations for a delay in the policy pivot until June. On the other hand, the USD could come under renewed selling pressure if the publication shows that policymakers are willing to consider a rate reduction by May. However, policymakers’ comments in the minutes are likely to be outdated due to the fact that the meeting took place before the latest inflation and employment data releases. Hence, the market reaction could remain short-lived.
Eren Sengezer, European Session Lead Analyst at FXStreet, shares a brief technical outlook for the USD Index:
“The 100-day Simple Moving Average and the Fibonacci 50% retracement of the October-December downtrend form a pivot area at 104.00-104.10. If DXY fails to stabilize above this region, 103.70 (200-day SMA) aligns as the next important support before 103.25 (Fibonacci 38.2% retracement). Looking north, 104.75 (Fibonacci 61.8% retracement) and 105.00 (psychological level, static level) could be set as the next bullish targets in case 104.00-104.10 holds as support.”
US Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
