Market To Scrutinise FOMC Minutes Amid Hot Economy

Traders are looking for guidance amid a barrage of data, as the Fed's minutes could offer clues about when to expect the next rate cut, which could boost the EURUSD.

What the Market Is Looking For

• The FOMC minutes come out ahead of key GDP and CPI figures, which are expected to show the US economy remains relatively hot.
• Recent commentary from dovish Fed officials has pointed to easing inflation pressure after strong January NFP numbers.
• Markets are looking to see how the appointment of Kevin Warsh to succeed Powell in May will affect the voting math on the FOMC.

How Can the Fed Cut With a Strong Economy?

The Fed will publish the minutes of its last policy meeting on Wednesday, with traders looking for any additional details that could give a better picture of when to expect the next rate cut. The last meeting was fairly uneventful, with policy kept unchanged, as was widely expected after three consecutive rate cuts last year. The main focus was on the political situation, as the meeting happened soon after Fed Chair Jerome Powell disclosed a DOJ probe into the institution, which threatened its independence. Since then, there have been some surprises in the data, such as the recent strong NFP figures, which could add context to Fed officials' remarks. Recent meetings have been unusually contentious, with dissenting voters amid a contingent echoing US President Donald Trump's push to lower rates. However, that was based on a perception of a slowing economy and growing slack in the labour market. What could also affect the EURUSD in this context is the publication of the US Q4 GDP on Friday, which is expected to show the economy decelerated to an annual growth rate of 3.0% from 4.4% in Q3.

Markets have virtually priced out a March rate cut (less than 10% odds) and aren't expecting the Fed to ease until June at the earliest. This could mean the FOMC minutes have little impact on markets unless they signal a rate cut will be considerably sooner than currently expected. The markets are pricing in up to two cuts by the end of the year, in contrast to the ECB's no-cut policy. However, sluggish growth in the Eurozone and a stronger euro have raised the possibility that the ECB could cut. If US data continues to come in stronger than anticipated, the market could price out a second rate cut. Overall, that would likely drag on the EURUSD. The Fed's preferred inflation measure, the Core PCE price index for December, will also be released on Friday and is expected to remain unchanged at 2.8%.

Some Indicators Point to Cuts

After the strong NFP figures from last week, dovish FOMC officials have pivoted to the components of the CPI, suggesting inflation will continue to fall. Service inflation, in particular, underperformed, as FOMC member Autan Goolsbee noted, saying there could be "several" rate cuts this year. Traders will also be looking at the minutes to better understand how the prospective appointment of Kevin Warsh as Fed Chair will affect the decision-making process and how well Powell's more hawkish tone reflects the board's sentiment. A more dovish read could weaken the dollar and push the EURUSD higher, while an emphasis by FOMC members on sticky inflation could be considered more hawkish and drag the currency pair lower.

EURUSD Sits in the Middle of VWAP Range

After peaking at 1.2080, EURUSD turned lower to 1.1760 but has since recovered some, with 1.1800 acting as a major support level. However, as the VWAP upper and lower bands are flattening out, a sideways continuation could keep prices within the 1.1738-1.1990 range, putting emphasis on short-term moves. On the downside, minor support lies at 1.1767, while on the upside, resistance sits at the early February high of 1.1930.

Source: SpreadEx | EURUSD