06.01.202210:44 Forex Analysis & Reviews: EUR/USD. What was the content of the Fed's minutes?

The minutes of the last Fed meeting published yesterday provided little support for the US currency. The document reflected the hawkish sentiments that are hovering in the Fed's camp. Despite the fact that many of the messages were predictable, the US dollar index reacted positively to the release. USD bulls have strengthened their positions in all major pairs, albeit not much. For example, the EUR/USD pair only retreated from the intraday high (1.1347), returning to the bottom of 1.13. The members of the US regulator did not disappoint but also did not surprise the market participants with their "super-hawkish" attitude. Therefore, the Fed's minutes provided only background support to the US dollar. Traders are still waiting for the key release of the week – Nonfarm data this Friday.

Let's talk more about the minutes. It can be recalled that after the results of the December meeting, we were pleased with the dotted graph of individual forecasts of the Committee members. The updated diagram has surpassed even experts' wildest expectations. All Fed members predicted the first rate hike in 2022, although there were only nine representatives of the Committee that were hawkish at the end of the September meeting. Moreover, ten officials are expecting three rounds of increases this year. The regulator is ready to keep a similar rate of increase in 2023 – most of the Fed representatives also predicted three increases. By the end of 2024, 5 out of 18 Committee members believe that the rate will be at or above 2.5% of this target. The most "hawkish" forecast, which was voiced by only three officials, provides for an increase in the rate in 2023 to 2.25%.

In other words, traders are 100% confident that the Fed will make at least one rate hike this year. However, market participants, provoked by the hawkish comments, are putting in prices a double or even triple increase in the current year. In fact, it is due to this that the published minutes provided such modest support to the US dollar: after all, the document only confirmed the implementation of the "baseline scenario" of a hawkish character. It is not known how aggressive the rate hike will be this year. The Fed's minutes did not answer this question, although they were encouraging in terms of hawkish intentions.

There are two main messages from the minutes of the December meeting: 1) the current macroeconomic conditions may lead to an earlier start of the rate hike cycle; 2) the rate of increase may be faster than previously expected. In addition, according to the content of the document, some members of the Committee also spoke in favor of the beginning of the reduction of the Fed's balance sheet shortly after the start of the rate hike. However, it should be noted that this does not indicate many circumstances that would make it possible to understand the alignment of forces in the Fed camp. For example, it is unknown how many members of the Committee supported the idea of reducing the balance sheet.

But in general, the essence of the published document is clear and understandable. The minutes actually leveled some concerns of dollar bulls: the Fed is not going to retreat from its stated intentions, that is if inflation continues to show upward dynamics or stay at the current level and if Nonfarm data will not disappoint. In this context, it is necessary to pay attention once again to the following phrase of the document: "the conditions necessary for raising the rate can be fulfilled earlier if the labor market continues to improve at the current pace." This formulation shifts the emphasis to the next Nonfarm. If the US labor market does not disappoint, the Fed may decide to raise the rate already at the April meeting as Fed representative Neel Kashkari hinted yesterday. Therefore, tomorrow's release may provoke increased volatility among dollar pairs.

Overall, the Fed's minutes did not bring any surprises, but this document confirmed the hawkish position of the regulator's members. Here, it must be recalled that since January 2019, Jerome Powell has been talking to journalists after each meeting (and not 4 times a year, as it was before 2019). Therefore, traders have the opportunity to find out the details of the meeting of the Fed members immediately after its completion. In this context, the significance of the minutes is somewhat reduced, since the market already has basic information about the mood in the camp of the regulator by the time of its publication, namely two weeks after the meeting. This explains such a weak reaction of the market. Although yesterday's release was another obstacle for strengthening the US currency in the medium and long term.

All this suggests that any more or less large-scale upward surges in the EUR/USD pair can still be used as an excuse to open short positions. The nearest downward target is the level of 1.1240 (the lower line of the Bollinger Bands indicator on the D1 timeframe).