FOMC Minutes Preview: Reinforcing higher for longer
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- The Federal Reserve will release the minutes of the FOMC meeting held on September 19-20.
- The Fed suggested that additional rate hikes may be appropriate before the end of the year.
- The US Dollar Index is undergoing a downward correction following an extended rally.
The US Federal Reserve (Fed) will release the minutes of the Federal Open Market Committee's (FOMC) September 19-20 policy meeting at 18:00 GMT on Wednesday, October 11. These minutes will provide insights into policymakers' views on the current stance of monetary policy. Traders and investors will be closely analyzing the minutes for any indications of what conditions it would take for the Fed to raise rates further.
During the September meeting, the FOMC decided to maintain the federal funds rate within the range of 5.25% to 5.5%, as expected. The accompanying statement showed minimal changes compared to previous meetings. The economic projections indicated the possibility of another rate hike before the end of the year.
Inflationary pressures in the US are diminishing, alleviating the need for the Fed to tighten monetary policy further. However, economic activity remains resilient, and the labor market continues to show strength, as the recent official employment report demonstrates. This suggests that the Fed still has room to continue raising interest rates.
While the central bank remains data-dependent, inflation is one of the crucial economic indicators to monitor, apart from any unexpected economic boom (which is not currently evident). Before the release of the FOMC minutes, the September Producer Price Index (PPI) will be published, followed by the Consumer Price Index (CPI) on Thursday. These reports are expected to hold more significance than the minutes themselves, as they provide insights into the current inflationary pressures in the economy.
Unless the minutes reveal surprising or clear forward guidance, which is unlikely, they may not significantly impact market expectations regarding the Fed's next moves. The upcoming FOMC meeting is scheduled for October 31 - November 1, and the market anticipates no changes at that meeting.
The CME FedWatch Tool indicates that market expectations are for interest rates to remain steady until at least June of next year, at this point, the probability of rate cuts rises above 50%. This suggests that the market does not anticipate a significant tightening or rebound in inflation in the short term.
During the September meeting, Federal Reserve officials expressed a higher possibility of a "soft landing." This, combined with a slowdown in inflation, suggests a scenario of no rate hikes. However, the focus shifts to how long rates will remain elevated, which depends on the balance between the economy and inflation.
The upcoming release of the Consumer Price Index for September is expected to show a decline in the annual inflation rate from 3.7% to 3.6%. While the Fed would welcome this, it would still indicate inflation above the target, necessitating the need to maintain high rates.
Recent developments in the Middle East have introduced new factors that were non-existent at the time of the September FOMC meeting. These developments could have significant market implications, particularly regarding risk aversion and Crude Oil prices.
The better performance of the US economy compared to European countries has been a critical driver for the strength of the US Dollar. While the Dollar has recently started to correct lower, the fundamental factors still favor it. If the minutes point to a willingness to further increase rates as a precaution against a resurgence of inflation or any similar indication, the Greenback could gain strength. Conversely, suggestions that the Fed is done hiking rates would likely have a neutral impact. If the document leads the market to consider the possibility of rate cuts before June, the US Dollar could face downward pressure.
US Dollar Index: The uptrend weakness further
The US Dollar Index (DXY) has been testing support at the 20-day Simple Moving Average (SMA) since early September, pulling back from multi-month highs. Technical indicators on the daily chart suggest a downside bias, with Momentum, the Relative Strength Index (RSI), and the Moving Average Convergence Divergence (MACD) moving lower. However, the overall trend remains bullish.
If consolidation below 106.00 solidifies, it could potentially lead to further downside, initially targeting 105.50 and then the substantial support area around 104.40, which could limit the downward move.
On the other hand, if the DXY remains above the 20-day SMA, it could extend the consolidation phase between 106.00 and 107.00. A daily close well above the 107.00 level would indicate a potential resumption of the bullish trend.
