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The latest Fed minutes, which was released on Wednesday, confirmed all the fears that have formed in the markets - rates are likely to increase much earlier than scheduled. These negative sentiments were not even offset by good data on US jobless claims, strong CPI report and best performance in the University of Michigan's consumer expectations and sentiment indices.
What did the protocol show investors? First and foremost, the central bank is determined not only to reduce monthly bond purchases by $ 15 billion, but to begin the process of normalizing monetary policy by raising interest rates. Some members even expressed their opinion about a larger cut in bond purchases, which, if happens, will force the Fed to increase rates much earlier than planned. But these views are all based on continued growth in inflation. So, if it gains in November and December, the central bank will have to raise rates in the first quarter of next year.
In the event that the Fed does not have time to finish the termination of bond purchases, is faced with rising inflation, but does not dare to start raising rates in the first quarter, its members are likely to carry out active verbal intervention to try to put pressure on price increases.
How will this affect the markets? A hawkish stance will stimulate further sales of government bonds, which will support the rise in Treasury yields. In this case, the cost of borrowing will rise, which will definitely hit companies in the US and all over the world. Of course, this will not drag the dollar down, but will push it up against other currencies. This will continue until the other central banks - the Bank of England, the ECB, and so on - tighten their monetary policies. It will also stimulate the growth of the ICE dollar index to 100.00 points, which, if happens, will most likely push EUR/USD down to 1.0675, the low of February last year.
Summing up, it is very risky to bet against dollar in the forex market.
Forecasts for the day:
EUR/USD is recovering rather weakly, so our forecast remains the same. There is a very high chance that it will fall to 1.1175, and then to 1.1100.
NZD/USD has also declined to 0.6850, so it is likely that it will drop to 0.6800.
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