After a slow start to the week, at least when it comes to US data, volatility is poised to pick up on the third trading day of the week. Already today, traders have seen the latest data on the US housing market (Building Permits missed expectations, while Housing Starts came out in-line) and inflation (PPI showed a decline of -0.8% m/m vs. estimates of a -0.4% drop, while Core PPI also missed at -0.1% vs. 0.1% eyed), but the true marquee event will be the release of the minutes from the FOMC’s January meeting.
As a reminder, the Federal Reserve’s January statement came off as essentially unchanged, with a small nod to the improving labor markets countered by increasing concern about “international developments” (see “FOMC Statement Instant Reaction: Overseas Albatross Around the US Economy’s Neck?” for more). Today’s minutes will no doubt shed further light on the internal views of the central bank, but the most important factor to keep in mind is that the economy has evolved since late January, most notably due to the near-perfect US NFP report earlier this month. Therefore, the data-dependent views of the Federal Reserve presidents may have also evolved over the last few weeks; in other words, there is a risk that the market will view today’s FOMC minutes as a bit “stale,” regardless of what they say. That said, there are still a couple of factors that traders will be looking for clarity on:
- As ever, any hints about the committee’s planned “lift-off” date for interest rates will be closely scrutinized. The minutes are unlikely to show that the central bank explicitly discussed the potential for a June rate hike, but dollar bulls may opt to don their rose-colored glasses as long as the FOMC does not rule it out.
- Related to the above bullet, forward guidance will also be a key theme of today’s minutes. The central bank would almost certainly have discussed when it will drop the “patient” / “considerable time” (before raising interest rates) pledge. Many market participants will view this development, when it occurs, as a three-to-six-month warning for an interest rate hike, with obvious bullish implications for the US dollar.
- Any comments about “slack” in the labor market will be interpreted through the lens of January’s stellar jobs report, so hints that the labor market was tightening prior to that release could support the hawkish Fed/bullish dollar view.
- Oil’s precipitous drop will also be on the committee’s mind. In general, the Fed has been content to look past the accompanying decline in headline inflation and view oil’s drop as a net positive for the US economy, so traders will seek to gauge whether the Fed has maintained that view.
- The Fed has also been sanguine about the rise in the dollar to date. Though it’s not our base case, signs of increasing concern on that front may push back interest rate hike expectations at the margin.
Considering all these factors, today’s FOMC minutes may lend support to the dollar. Unless the minutes show that the committee was far more dovish than the headline statement, traders could adopt the view that the strong jobs report ameliorates the central bank’s near-term concerns. If the market indeed takes this perspective, King Dollar could extend its dominion and continue to attract new subjects.