Fed minutes show that almost all officials backed 25bps hike
Dollar strengthens as they remain willing to adjust as necessary
Yen traders await Ueda’s first speech after his nomination
Dollar gains more as Fed hike bets remain elevated
The US dollar continued trading higher against most of the other major currencies on Wednesday, but today it is pulling back.
The minutes of the latest FOMC meeting allowed investors to keep bets with regards to the future path of US interest rates well elevated. Yes, they showed that almost all policymakers backed a decision to further slow the pace of rate hikes to 25bps, but they also revealed that how inflation performs would be crucial with regards to future decisions. The minutes also showed that a few participants favored a larger 50bps increase or said they “could have supported” it.
There was no surprise in the minutes, especially with some officials being overly vocal lately that they argued about a bigger hike. However, the fact that the Committee remained willing to adjust if needed adds credence to investors’ pricing. That view was expressed before the streak of upbeat US economic data and the hotter-than-expected inflation print for January, which means that more officials may now be leaning towards higher rates. With what they have in hand now, even if they proceed with another 25bps hike at the March gathering, they could very well lift the median dot for 2023 up.
Nonetheless, that’s far from being set in stone as ahead of the March gathering, investors and the Fed itself will have to digest several more key data releases, including the employment and inflation reports for February. Combined with rising hike bets regarding other major central banks as well, this keeps the case of a full-scale bullish reversal in the dollar premature. Today, the second estimate of the US GDP for Q4 is on the agenda, but it is just expected to confirm its first estimate.
Yen awaits testimony by Ueda
The Japanese yen held its ground against the greenback, with dollar/yen ending Wednesday nearly unchanged. The pair may continue trading in a quiet manner today as well, with traders refraining from engaging in large positions ahead of Japan’s National CPI data, due to be released during the Asian session Friday, but most importantly ahead of a speech by BoJ Governor nominee Kazuo Ueda, who is set to speak in a confirmation hearing in the lower house of the Japanese parliament.
Despite saying that the current monetary policy approach remains appropriate just after the first round of rumors regarding his nomination, this will be his first speech after the government’s official announcement and thus, investors may be sitting on the edge of their seats in anticipation of his views on the direction of monetary policy.
In a column he published last July, Ueda argued against raising interest rates prematurely, but he highlighted the difficulty of maintaining yield curve control as inflation bites harder and pointed to the flaws of this policy. This may be a first sign that he may not be in a rush to take interest rates out of negative territory, but also that he may not hesitate to scrap yield curve control policy entirely should economic conditions warrant so.
Therefore, any remarks pointing to further actions towards normalization as soon as he takes the helm could prove supportive for the Japanese currency, especially if Japan’s inflation keeps accelerating as the forecasts suggest. On the other hand, should his comments be interpreted as more dovish than expected, the yen could slide, perhaps driving dollar/yen above Tuesday’s high of 135.22.
S&P 500 and Dow Jones extend losses, Nasdaq rebounds
With the minutes adding to the narrative that the Fed could proceed more aggressively than previously expected as data continue to paint a brighter picture with regards to the US economy, the S&P 500 and the Dow Jones extended their recent losses. Strangely enough however, the otherwise more rate-sensitive Nasdaq rebounded and ended the session with gains.
Perhaps that was because it fell the most on Tuesday, when Wall Street suffered its worst day for 2023, offering a better risk-to-reward ratio for those intending to buy. In any case, with US interest rates expected to peak at 5.36% this year, and with all the previously anticipated cuts for the year being priced out, it is hard to envision equities drifting further north and heading towards their record highs. Higher interest rates mean lower valuations, which combined with potential downward earnings revisions could keep equities under pressure for a while longer.
Oil prices were also pressured by expectations of more aggressive interest rate increases by the Fed and other major central banks, as higher rates could further dent economic growth and thereby weigh on fuel demand. WTI fell around 3% yesterday, but in the bigger picture it is still trading in a sideways manner between 72.20 and 82.50. For the picture to notably darken, a break below the lower end of that range may be needed.