Today at 07:00 pm GMT the Minutes from the December FOMC meeting will be released. What is worth knowing before today's event?
- The Fed raised rates by 50 bp in December, which was a much smaller move compared to previous months
- The macroeconomic projections were perceived as hawkish. Fed members expect higher inflation and a higher terminal rate
- Majority of Fed members see futures rate above 5%
- The November minutes were received dovish, as some members expressed concerns about a slowdown in the labor market
- The slowdown in the labor market did not materialize, which is why in December policymakers could argue that strong labor market determines the need for further interest rate hikes
- EURUSD and S&P 500 rebounded after last November minutes (November 23)
- The market is still pricing in a much lower FED's terminal rate, so there is room for a surprise if the central bank focuses on an overly strong labor market
- Some believe that Fed members could point out that disinflationary signals are "temporary" and inflation will resume upward move
- On the other hand, inflation has lost its momentum recently and several indicators point to a significant decline of price pressures
Policymakers significantly raised projections of the FED funds rate for next year. Nevertheless, the market still sees a forward rate of 4.5% in 2023. Source: Bloomberg
The US labour market is extremely tight. Wage dynamics remain high, while the unemployment rate and claims numbers remain low, far from the Fed's projection, which assumes a rebound well above 4% this year. Source: Bloomberg
The ZEW institute's US inflation expectations (postponed by 9 months) indicate that disinflation may be approaching. Source: Bloomberg
EURUSD rebounded after the publication of November Minutes, mainly due to the fact that they were perceived as less hawkish than the communiqués and conferences themselves. Today, market reaction may be different, as recently investors basically ignored the very hawkish Fed. Source: Bloomberg
EURUSD broke out of consolidation during yesterday's session and today dropped below support at 1.0600. If today's Minutes are perceived as hawkish by the markets, then the most popular currency pair could test even the 1.0450 level and erase the divergence with TNOTE. On the other hand, if Fed members emphasize uncertainty regarding the labor market, then the upper limit of consolidation around 1.0700 could be at risk, and the US 10Y bond yields will return significantly below 3.5%. Source: xStation5
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