USD Retreat Salls As FOMC Minutes Show Rates Higher-For-Longer

The USD has been on a bearish trend since early April, but it started making some gains yesterday, helped by the FOMC meeting minutes, which were less dovish than markets were expecting. They indicated that the FED is not really thinking about delivering the first interest rate cut soon, which is more hawkish than all other major central banks, so that should help the USD in the mid-term.

EUR/USD Chart H4 – Slipping Below the 50 SMA

EUR/USD was being supported by moving averages on the way up, which has mainly been a result of a weaker dollar, rather than a strong Euro. But, buyers seem to be getting cold feet near the 1.10 level, which is a major resistance zone and this week we’re seeing a bearish reversal. The FOMC minutes yesterday helped the USD, with most members not sure when to start lowering interest rates.

The interviewees’ observations regarding the improved balance between labor demand and supply align with broader economic trends, contributing to a reduction in nominal wage pressures. Factors such as increased labor force participation rates and immigration have expanded the labor supply over the past year, easing some of the pressures on wages.

The potential for core non-housing services price inflation to resume hinges on several factors, including further slowing of wage growth and a more balanced labor demand-supply dynamic. This could be facilitated by continued increases in labor force participation and robust immigration flows.

Moreover, some participants highlighted the potential for sustained higher productivity growth through the adoption of technologies like artificial intelligence (AI) in corporate processes. Additionally, increasing the rate of new business creation, particularly in the technology sector, could contribute to enhanced productivity levels.

Summary of the Fed’s April 30-May 1 Meeting Minutes

1. Inflation Outlook:
   • Extended Timeline: Participants assessed that it would take longer than previously anticipated to gain greater confidence in inflation moving sustainably to the 2% target.
   • Disinflation Process: Recent data has not increased confidence in progress towards the 2% inflation goal, suggesting the disinflation process will take longer.
2. Policy Tightening:
   • Willingness to Tighten: Various participants expressed willingness to tighten monetary policy further should risks to the economic outlook materialize and make such action appropriate.
   • Uncertainty on Restrictiveness: Many participants commented on their uncertainty regarding the degree of policy restrictiveness needed to achieve inflation goals.
3. Future Policy Path:
   • Data Dependency: The future path of monetary policy will depend on incoming data, the evolving economic outlook, and the balance of risks.
4. Central Bank Securities Holdings:
   • Pace of Reduction: Almost all participants supported the decision to begin to slow the pace of the decline in the central bank’s securities holdings. A few participants could have supported the continuation of the current pace.
   • Longer-Run Portfolio Composition: A couple of participants suggested it would be useful to start discussions on the appropriate longer-run maturity composition of the Fed’s portfolio.
5. Economic Projections:
   • Similar to March Outlook: The Fed staff’s economic projection was largely similar to the March outlook.
   • Household Financial Positions: The projection noted that deteriorating household financial positions, particularly for lower-income households, might prove to be a bigger drag on economic activity than previously anticipated.

Key FOMC Minutes Takeaways:

• Extended Disinflation Timeline: The Fed acknowledges that achieving the 2% inflation target may take longer than initially expected.
• Willingness to Tighten: There is a readiness among participants to further tighten policy if necessary.
• Data-Dependent Approach: Future policy decisions will heavily rely on incoming economic data.
• Adjustments in Securities Holdings: The Fed is adjusting the pace of its securities holdings reduction and contemplating the long-term composition of its portfolio.
• Economic Concerns: Economic projections remain similar, but there are increased concerns about the financial health of lower-income households impacting overall economic activity.

EUR/USD Live Chart

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Skerdian Meta

Lead Analyst

Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.

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