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US Dollar Clings onto Gains as FOMC Minutes Highlight Firm Fed

US Dollar Clings onto Gains as FOMC Minutes Highlight Firm Fed

Rich Dvorak, Analyst

US DOLLAR, FEDERAL RESERVE, FOMC MINUTES – TALKING POINTS:

The FOMC minutes from the October Fed Meeting just crossed the wires and is having a mixed impact on the US Dollar so far. USD price action is currently being overwhelmed by the most recent trade war headlines, which noted a growing risk that the US and China will fail to finalize a highly-anticipated phase one trade deal before year-end.

Despite the direction of the US Dollar being driven overwhelmingly by US-China trade talk headlines at the moment, a plethora of insight found in the most recent FOMC minutes details the Federal Reserve’s current monetary policy stance and outlook.

US DOLLAR INDEX PRICE CHART: 5-MINUTE TIME FRAME (NOVEMBER 20, 2019 INTRADAY)

US Dollar Index Price Chart Technical Analysis October Fed Minutes

Chart created by @RichDvorakFX with TradingView

FOMC officials seem increasingly less dovish as several Fed members communicated their hesitation toward providing further insurance against downside risks to the US economy. Elevated downside risks have stemmed predominantly from slowing global GDP growth induced by the ongoing US-China trade war.

The Fed has slashed its policy interest rate – the Federal funds rate (FFR) – by 0.25% at the central bank’s last three consecutive meetings in hopes of boosting sluggish inflation and sustaining the economic expansion but is now favoring a relatively firmer ‘wait-and-see’ approach. On that note, the FOMC minutes noted how some central bankers see improvement in spending across interest rate sensitive industries.

CHART OF FOMC INTEREST RATE CUT EXPECTATIONS (SEPTEMBER 2020)

Chart of FOMC Interest Rate Cut Probabilities

The Fed meeting minutes pointed out how some FOMC officials wanted to signal no additional interest rate cuts are currently on the table, however, with the current target FFR level being ‘appropriate.’ This compares to the market’s expectation for another 25-basis point interest rate cut by the FOMC rate review scheduled for July 2020. Meanwhile, there is a 73.2% probability that the central bank will cut rates by the September 2020 Fed meeting.

Yet the Federal Reserve seems to have left the door open for a potential shift back to an accommodative stance if there is a material reassessment to US economic outlook (i.e. US economic fundamentals deteriorate from current levels). Fed officials noted that they see the US unemployment rate remaining roughly flat through 2022 while some FOMC participants see low inflation readings as transitory.

CHART OF FED BALANCE SHEET – TOTAL ASSETS

Chart of Fed Balance Sheet

Another key highlight from the October Fed minutes is the insight provided on overnight funding markets. The FOMC minutes outlined how the Fed is not ready to commit to a long-term liquidity plan but some participants saw benefits to a standing repo facility, which would make the Fed’s involvement in overnight repos more permanent. Likewise, some Fed members favored a slower pace of injecting cash into the financial system via T-bill purchases.

Since the beginning of September and onset of repo market turmoil, the Federal Reserve balance sheet has ballooned a whopping $288 billion. Growing at its current pace, the Fed balance sheet is expected to top $4.2 trillion by the end of 2019. Nevertheless, Fed Chair Powell adamantly claims that repo market operations should not be confused with quantitative easing (QE).

For comprehensive fundamental and technical insight on the US Dollar, download our free 4Q-2019 Forecasts and Trading Guides.

-- Written by Rich Dvorak, Junior Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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