Summary:
- FOMC Minutes to be released at 7:00 pm BST
- Markets wonder whether central bankers discussed rate cut
- USDIDX at 2-year highs, EURUSD close to local low
The Federal Reserve will release the Minutes from the latest FOMC meeting (1 May 2019) at 7:00 pm BST. As always the publication will be closely watched by market participants from all over the world therefore elevated volatility may be present. In this short analysis we will take a look at what investors can expect from the event.
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US Dollar index (USDIDX) is approaching the latest local high at 98.065 pts. A break higher would see the index at the highest level since mid-May 2017. Note that price seems to respect 50-session moving average (orange circles) therefore it could serve as the first support in case of a pullback. Source: xStation5
What happened on the first day of May?
Expectations ahead of the latest FOMC meeting were quite dovish. While consensus point to no change in the level of interest rates, markets speculated that the US central bankers may consider lowering borrowing costs in response to the latest economic developments, especially struggling inflation. As expected Fed did not change range for the federal funds rate. However, the interest rate on excess reserves was slashed by 5 basis points, a technical move aimed at improving liquidity on the interbank market. The Bank reiterated that there is a need for patience in relation to interest rate hikes. The decision was followed by a sharp move higher on the USD market as no cut was mentioned in relation to the main interest rate.
EURUSD continues to trade below the downward sloping trend line. The main currency pair has been in a prolonged downward move for over a year now and the latest price action shows that bulls have little steam to strike back. The nearest support level is localized at the latest local low of 1.1117. Source: xStation5
What could Minutes show?
While lowering of the main rate was not mentioned in statement or during the press conference, it does not mean that the topic did not surface during the discussion. Recalling speeches delivered by Fed Vice Chairman Clarida and Chicago Fed President Evans in April one can rule that the topic may have been raised. During an interview in the first half of April Clarida recalled that the Federal Reserve has made “insurance” cuts in the past that were aimed at protecting economic expansion. A few days later Evans said that a drop of core inflation to 1.5% could be a signal for lowering rates and Fed’s preferred inflation measure - core PCE - sat at 1.6% at the end of Q1 2019. Having said that, some discussion could have taken place. A thing to note is that the Fed Chair, Jerome Powell, claims that inflation problems are just transitory so direction and scale of market reaction may depend on how many policymakers echoed this view and how many opposed it.
USDJPY bounced off the 109 handle and surged above the 110 handle few days later. A number of hurdles lie ahead of bulls in case they want to extend the upward move - 50- and 200-session moving average, downward sloping trendline and resistance zone ranging above 112 handle. Source: xStation5
What will not be addressed in Minutes?
One thing that surely will not be addressed in Minutes is the latest escalation in trade war. The reason is simple - FOMC met prior to the recent deterioration in the Sino-US relationship. Apart from that, it seems likely that there will be little details on the composition of the balance sheet after trimming ends in September. Jerome Powell said that bankers discussed it but the discussion was preliminary and they will return to it closer to the year-end.
A thing to note here is that the USD market often experiences opposite reactions to FOMC decision and Minutes. Namely, USD-positive decision is often followed by USD-negative Minutes and vice versa. Given that USD experience major jump higher in the aftermath of the latest decision, this correlation does not bode well for bulls. However, there is little if any rationale behind such correlation therefore it should be treated with caution.
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