Notes from the FOMC meeting did not make much impression on the market

Due to the “hawkish” tone of the minutes from the last FOMC meeting, the dollar reacted with only a temporary, minimal strengthening. The US indices basically passed this document unmoved, ending the day with moderate gains. A greater reaction to FX could be seen after the worse-than-expected ISM reading for US manufacturing. In Europe, equities rose strongly for another straight session as inflationary pressures eased and the Chinese economy reopened.

Fighting inflation

It still exists discrepancy between the expectations of the Fed and the market, which remains the main risk for the dollar. Minutes of the December meeting FOMC strengthened the US institution's zeal to fight inflation and raise interest rates further this year. The notes noted that although Fed Chairman Jerome Powell signaled a slower pace of monetary tightening increases, "this was not a sign of any weakening of the committee's determination to meet the price stability objective or assessment that inflation was already on a sustained downward path."

Officials expressed frustration that the market is still pricing in interest rate cuts in the second half of the year. It stated that "unwarranted loosening of financial conditions, especially if it resulted from the public's misperception of the committee's reaction function, would complicate the FOMC's efforts to restore price stability." Thus, the possibility of cutting the cost of money in 2023 was rejected. None of the participants anticipated such a scenario.

Members generally noted that the restrictive policy stance will have to be maintained until incoming data provide confidence that inflation is on a sustained downward path to 2%, which is likely to take "some" time. Fed fund futures continue to price cuts that the Fed will start a monetary easing cycle this year as a result of the recession (first cuts). This attitude did not change significantly after the publication of the last "minutes".

Continuation of raising interest rates

Yesterday we received another hawkish signal in the form of the statement of the Minneapolis Fed chairman. Neel Kashkari pointed out that it would be appropriate to continue raising rates at least in the next few meetings until the Fed is sure that price growth momentum has peaked. In his opinion, the cycle may end even at the level of 5,4%, which would mean that we are facing further moves by a total of 90 basis points.

Despite such restrictive signals there was no major reaction from the market. Wall Street indices ended the day with slight gains. At the end of the day, the dollar finally lost, although it gained slightly around 20 p.m. More volatility on FX prevailed in the early hours of the European session. Couple EUR / USD after Tuesday's declines, it was already trading above 1,06 on Wednesday.

From hard data, we received ISM for industry, which slightly disappointed (48,4 points) and the "JOLTS" report, which showed that the number of vacancies and employee turnover remained at 10,46 million and October data was revised to 10,51, XNUMX million. Today we have the ADP and the weekly number of claims for unemployment benefits in front of us.

These publications will certainly shed light on tomorrow's reading NFPthat maybe increase the volatility in the market.

Source: Lukasz Zembik, OANDA TMS Brokers