FOMC Minutes Review

Yesterday, traders were waiting for the January FOMC minutes after policymakers announced then that the Fed will continue the course reducing the asset-purchase program by another $10bn down to $65bn a month. We saw that several participants were in favour of continuing to reduce the pace of purchases at every meeting, which means that QE4Ever would come to an end in December 2014.

Despite two poor Non-Farm-Payrolls prints (revised 75K in December, and 113K in January vs 180K expected) and a slowing housing market (Housing starts were down 16.0% in January to 0.880M vs 0.950M expected, Mortgage Applications dropped to a 19-year low with the index falling by 16% over the past 5 weeks), US policymakers didn’t seem concern about the fragile recovery the economy seems to be facing at the moment. This decision could act in favour of the US Dollar (against most of the currencies) as the market was expecting a dovish Yellen before she took office as Chairman of the Federal Reserve; instead, she has been defending the gradual tapering path Ben Bernanke outlined in December.

Another important announcement the market was waiting yesterday was the update on the forward guidance. As you know, following the December 2012 meeting, Bernanke and his fellows introduced the forward guidance and indicated that the Fed Funds rate will remain low (0 – ¼ percent range) as long as the unemployment rate remains above 6.5% (with an annual inflation rate below 2.5 percent). With the unemployment rate falling from 7.9% to 6.6% in the past 14 months, it stands now closed to the 6.5-percent threshold and traders are now wondering if the Fed will act earlier than expected. Policymakers announced already a few times that there was no immediate need of such an act and that they would wait the jobless rate to decrease well below that threshold before starting to tighten. One of the market’s expectations now is that the Fed may decrease the threshold down to 6 percent in one of its following meetings (March meeting seemed likely until yesterday). However, yesterday’s minutes brought some confusion with participants favouring ‘qualitative guidance’ now, as several members suggested that ‘risks to financial stability should appear more explicitly in the list of factors that would guide decisions about the Federal funds rate’.

The US Dollar index eased by 20 pips after the FOMC minutes, and eventually found support slightly above 80. It is now trading at 80.28, and we believe there is potentially further room for Dollar strength in the short term. The next resistance zone on the topside stands at 80.70 / 80.80.

(Source: Reuters)

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