USD: FOMC minutes barely move the needle
Last night's release of FOMC minutes could have been perceived as slightly hawkish, yet FX and interest rate markets barely budged. At the heart of the 2023 story is the risk management trade-off of the Federal Reserve under-appreciating sticky inflation versus over-tightening and delivering weaker-than-needed growth. For the time being, the Fed is still more concerned by the former and plans ongoing rate increases. In practice, we think that means another 50bp hike from the Fed in February (the market seems to prefer 25bp hikes in February and March) and then rate cuts from the third quarter onwards. For rate markets the battle this year seems to be whether inflation will allow the Fed to deliver the roughly 50bp of easing expected in the second half of the year.
For today's session, the focus will be on the December ADP jobs data, where a +150k number is expected after last month's 127k rise. Currently, the consensus expects tomorrow's December nonfarm jobs reading at +200k. Yesterday we highlighted the importance of the JOLTS job opening data. The December figure showed a surprise rise, which will fan Fed fears of the US labour market staying tight. A firm ADP number today could also deliver a little support to US yields and the dollar.
Away from the Fed story, the market's early year focus is on China's Covid battle and slumping energy prices. Commodity markets - always very sensitive to the China demand story - are taking a cautious approach here. In other words, they are not prepared to look through (presumably) surging infections towards the second half growth story. Equally the China story, in addition to very warm weather, is weighing on energy prices where both oil and gas are plunging. Indeed, European natural gas now trades at a discount to Asian natural gas and warns that LNG shipments will be re-routed to Asia. For the time being this fall in natural gas is prompting a re-assessment of European growth prospects and supporting European FX - especially CE4 currencies. That may well remain the near-term trend unless US price data is sufficient to re-price the Fed tightening cycle to the 5.50% area and lift the dollar.
As above, ADP will be key for the dollar today. A subdued DXY range well within 104-105 looks likely.
Chris Turner
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