📉EURUSD below 1.03 ahead of Fed minutes

EURUSD declines ahead of the release of December Fed minutes at 7 PM GMT🗽

Although the Fed cut rates at its December meeting, the decision was seen as hawkish. The Fed reduced expectations for future cuts, indicating that rates will only be cut twice in 2025. At the same time, however, it is important to note the current situation in the US ahead of Trump's inauguration. The President-elect indicated in a recent speech that interest rates are too high. In turn, Michael Barr, the Fed's vice chairman for supervision, resigned from his seat on the Board of Governors, which could theoretically open the way for a less stringent regulatory approach. 

Hawkish cut in December 2024

The Fed decided to cut in December, and only Beth Hammack of the Cleveland Fed decided to vote to keep rates unchanged. On the other hand, the dot-plot for 2024 itself suggested as many as 4 votes for maintaining. In view of this, it can be expected that 3 members influenced by the discussions decided to follow the consensus. Nevertheless, the Fed members themselves see a limited number of reductions this year, which ultimately influenced the rather pronounced rise in yields in recent weeks. The Fed has also quite clearly raised inflation expectations for 2025, suggesting less willingness to cut. Still, the Fed does not know exactly how tariffs might affect inflation, as Trump's future policies remain unknown. 

The Fed has clearly raised expectations for interest rates in 2025. In turn, the implied path by interest rate contracts suggests that cuts will end sooner than expected. The rise in long-term yields in recent weeks has been very large indeed. Source: Bloomberg FInance LP, XTB

What then can be expected from the minutes?

• Most likely, the majority of members will express concern about the rebound in inflation
• A large portion of members may indicate that inflation has become uncertain due to Trump's policy uncertainty
• Uncertainty will most likely prompt FOMC members to take a more cautious approach

Uncertainty supports the dollar

• There is fairly mixed news coming out of the US media and sources. The Washington Post reported that Trump's team would take a slightly softer tariffs course. 
• However, Trump quickly 'dismissed' the validity of this information, and today's CNN reports pave the way for the opposite scenario, in which Trump is considering imposing a state of emergency to allow him to introduce a new tariff policy, quickly after January 20
• Markets don't like uncertainty, so the lack of clear signals and transparency about future White House policy is putting pressure on risky assets, especially technology stocks, and favouring the US dollar 
• Yields on 10-year U.S. Treasury bonds are hovering around 4.7%, further 'weighing down' stock market sentiment and supporting the dollar, against other currencies
• The Fed's Christopher Waller signaled that the short-term as well as long-term impact of higher tariffs on inflation and the economy is uncertain. He also signaled that he does not expect drastic increases in tariffs
• Waller conveyed that inflation is invariably on track to reach the 2% target and expects further rate cuts in 2025 
• The Fed may postpone decisions on rate cuts until the second half of the year, when the impact and Trump's new trade policy will be much clearer

EURUSD (H1, D1)

Demand for 'safe haven' assets, combined with weak macro data from the European economy, is weighing on sentiment for the EURUSD pair, where the difference in yields and the strength of the two economies could drive the pair to parity in 2025. Yields on 10-year bonds have recently risen to 4.7%, a level already higher than short-term interest rates. From the perspective of the last month, the term curve has changed its shape and now long-term yields are clearly higher than short-term rates. 10-year yields are already higher than current interest rates, even with the expectation of further cuts.

If the Fed minutes actually show that many members did not want to vote for cuts and the future approach will be more cautious, a further rise in yields cannot be ruled out, which could lead to a further bump on the EURUSD. At the same time, however, yields are already extremely high for the current monetary situation. More impetus will be needed for the EURUSD to fall towards parity. At the same time, in the event of an upward correction, the move should be limited by the downward trend line, which currently runs slightly above the 1.04 level. 

Source: xStation5

The EURUSD pair is today again testing levels not seen since November 2022.

Source: xStation5

Source: xStation5