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Fed Meeting Minutes May Revive US Dollar

Fed Meeting Minutes May Revive US Dollar

2016-04-04 06:44:00
Ilya Spivak, Sr. Currency Strategist

Talking Points:

  • March FOMC meeting minutes may drive US Dollar rebound
  • Hawkish shift in Fed outlook may sink gold, fuel risk aversion
  • Pound may recover, RBA rate decision possibly a non-event

Are FXCM traders buying or selling the US Dollar? Find out here!

Minutes from the March FOMC meeting headline the economic calendar in the week ahead. Chair Yellen and company appear to have launched a new policy communication strategy last month, aiming to realign official and market-based expectations for the 2016 rate hike path. This is likely aimed at avoiding counter-productive risk aversion when tightening resumes.

To that end, the Fed lowered its forecast to match the setting investors were comfortable with pre-"liftoff", calling for two hikes this year, and seems to be looking to recent improvements in US economic news-flow to inspire a return there in the markets' priced-in outlook. This seems meant to make for a smooth hike in June.

A key part to this strategy is connecting strong US data with policy bets. This link breaks down if investors believe external problems are already damaging the outlook, which seems to be the message they took away from recent Fed commentary. Yellen has indirectly spoken out against this interpretation already but the Minutes release offers a chance to do so unmistakably.

If the document stresses that outside threats are being watched but have yet to actually undermine progress toward policy objectives, markets may reconsider the landscape. A re-assessment of the extent to which recently upbeat economic outcomes ought to be reflected in stimulus withdrawal expectations may boost the US Dollar while weighing on gold. It may likewise undermine risk appetite, with commodity-bloc FX following stocks lower as the Japanese Yen gains.

Elsewhere on the docket, an upbeat round of UK PMI figures may help the British Pound regain some lost ground after a sharp selloff late last week. That move may reflected an exodus from GBP-denominated assets at the start of the second quarter as well as the new UK fiscal year inspired by risks linked to June's “Brexit” referendum. Meanwhile, the RBA monetary policy announcement may prove to be a non-event.

--- Created by Ilya Spivak, Currency Strategist for DailyFX.com

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