USD: FOMC minutes likely to provide another hawkish signal – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has strengthened modestly during the Asian resulting in the EUR/USD rate falling back below technical support at around the 1.0600-level.

Key Quotes

“The US dollar has derived some support overnight from further hawkish Fed rhetoric. Philadelphia Fed President Harker, who is voting FOMC member this year, told Market News International that “I would not take March off the table at this point. We’ll have to see how it plays out in the next few weeks”. He is looking for evidence of price pressures ahead of the next FOMC meeting on the 14th & 15th March, not only in the inflation numbers but also in the employment cost index or other measures of wages. He still believes that that three rate hikes is appropriate this year “depending on how things turn out”.”

“In contrast, the market remains unconvinced that the Fed will speed up rate hikes as currently planned in the coming years which is acting as a dampener on US dollar strength in the near-term. The yield on the two-year US Treasury bond has remained stable at around 1.2% over the last couple of months. The market clearly requires further convincing after the Fed took a full year to follow up the first hike.”

“The release tomorrow of the latest FOMC minutes may provide another signal that the Fed is moving closer to rising rates again as soon as in March or May. We expect the minutes from the February FOMC meeting to appear more hawkish than the accompanying statement. The US dollar has rebounded modestly since the February meeting. The accompanying statement signalled that the Fed had become more confident that inflation “will” rise back towards their target. The increased likelihood of the Fed raising rates sooner than expected should encourage the US dollar to strengthen further in the coming months against the other major currencies.”