📆 USD gains and equities drop ahead FOMC minutes scheduled for 7:00 pm GMT
- FOMC minutes to be released today at 7:00 pm GMT
- Document will related to December 12-13, 2023 meeting
- Fed left interest rates unchanged during December meeting
- New 'dots' pointed to three 25 basis point rate cuts in 2024
- Money markets price in almost 150 basis points of easing for 2024
- A look at US100, EURUSD and GOLD
FOMC minutes will be released today at 7:00 pm GMT and will be a key release of the day. Document will be related to the December meeting, which saw rates being held unchanged and FOMC interest rate projections being significantly revised. Moreover, Fed Chair Powell acknowledged that central bankers discussed rate cuts at the meeting, sparking a risk asset rally. However, FOMC minutes may show that the meeting was not as dovish as some think.
FOMC December 2023 meeting
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Create account Try a demo Download mobile app Download mobile appFOMC meeting in December 2023 was closely watched by market participants - it was a quarterly meeting accompanied by release of new economic projections, including the so-called dot-plot. 'Dots' from September meeting suggested a single 25 basis point rate cut in 2024, while money markets priced in over 100 basis points of easing prior to December meeting. Having said that, traders were focusing on how projections will be revised, with anything less than 3-4 cuts projected for this year being set to disappoint markets.
FOMC did not disappoint - December's dot-plot suggested three 25 basis point rate cuts in 2024. This has sparked a risk asset rally, with equities surging and USD dropping. Powell's confirmation that rate cuts were discussed at the meeting added more fuel to the rally.
Source: Federal Reserve
FOMC minutes to disappoint markets?
However, it looks like Fed may have been surprised by the scale of market moves the meeting triggered. Some Fed officials speaking since December 12-13, 2023 meeting have generally attempted to cool down market expectations, saying that rate cuts are not imminent. A point to note is that FOMC projections do not assume core PCE inflation returning to 2% inflation target until 2026, which is still a long time away. Having said that, the discussion reflected in today's FOMC minutes may not be as dovish as some hope. While there is a high likelihood that report will confirm that inflation is developing as expected, it is also likely to show many FOMC members agreeing that current level of rates is sufficiently restrictive. Given how dovish market reaction to December's meeting was, anything other than an outright mention of rate cuts in the early-2024, which is highly unlikely, may be seen as a disappointment and trigger a 'hawkish' market reaction.
Markets expect over 150 basis points of Fed easing in 2024
In spite of FOMC officials trying to cool dovish market expectations, money markets do not seem fazed. Fed funds futures are pricing in almost 150 basis point of easing for this year, almost twice as much as FOMC dot-plot. Rate cuts in the United States are coming in 2024 and there seems to be no question about it. However, a key question is about the timing of the first cut. Money markets fully price in the first cut for May 2024 meeting, as well as an over 80% chance of a cut at March 2024 meeting. So far, FOMC members in their speeches have been rather critical of an idea of cutting rates as early as Q1 2024.
Source: Bloomberg Finance LP
A look at the charts
US100
Nasdaq-100 futures (US100) managed to reach fresh all-time highs in mid-December, with the index climbing above the 17,000 pts mark in the second half of December. However, the beginning of a new year has been rather weak for the bulls, with US100 trading around 2.5% lower year-to-date. Index broke back below 2021 highs. FOMC minutes disappointment may trigger hawkish reaction that will add fuel to the sell-off.
Source: xStation5
EURUSD
Post-FOMC weakening of the US dollar allowed EURUSD to climb above 1.10 resistance and reach the highest level since late-July 2023. However, USD started to regain its shine at the turn of 2023 and 2024, and has been on the rise since. This pushed EURUSD back below 1.10 area. The pair is approaching 1.09 swing area, that may offer some support, but failure to confirm dovish expectations of the markets by FOMC minutes today may see USD strengthen further and the main currency pair drop below 1.09 area.
Source: xStation5
GOLD
Strengthening of the US dollar at the beginning of 2024 is putting pressure on precious metals. GOLD is pulling back from the $2,070 per ounce area, where it finished 2023 trading, and is making a break below the $2,050 area today. Lack of strong mention of rate cuts in minutes may support USD and put more pressure on precious metals. A key level to watch is the psychological $2,000 area, that saw a number of price reaction in 2022 and 2023.
Source: xStation5
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