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Dollar turns to Fed minutes for more fuel – Preview

  • Minutes of latest Fed meeting will be released at 19:00 GMT Wednesday

  • Given strength of US economy, Fed has warned against early rate cuts

  • If the minutes echo this view, dollar could extend its winning streak


Traders recalibrate Fed rate path

The US economy continues to fire on all cylinders. Economic growth is on track to hit 3% this quarter, the labor market is historically tight, and inflation readings have been persistently hot in recent months.

Reflecting this economic resilience, investors have been forced to dial back bets of imminent Fed rate cuts. Market pricing currently points to less than four cuts in total for 2024, down from six previously.

With traders increasingly adopting the view that US interest rates will remain higher for a longer period of time, the dollar has sprung back to life. The greenback is the best-performing major currency of 2024, having gained a whopping 6% against the Japanese yen already this year.

Fed minutes could endorse this shift

We have heard from several Fed officials since their latest meeting in January. Most of them have preached patience, warning against cutting interest rates too early, as that would raise the risk of inflation becoming stickier.

Incoming data since that meeting has also added credence to this view. Consumer and producer prices came in hotter than expected in January, while survey-based inflation expectations measures ticked higher, signaling that inflation is not cooling down as quickly as investors had hoped.

Even though Fed officials did not have access to this data when they met, the minutes are often “massaged” after the event to highlight certain points the central bank wants to convey to investors. In this case, the underlying message might be that the US economy is simply too hot for the Fed to cut interest rates in the near future.

Therefore, the minutes could help the dollar resume its recent rally. Taking a look at the dollar/yen chart, the recent high of 150.90 could be the first barrier on the upside if the minutes indeed dispel speculation of imminent rate cuts. On the flipside, a more cautious tone could push the pair lower, turning the focus towards the 149.50 region.

Dollar outlook is still bright 

In the bigger picture, the dollar has scope to run even higher. The United States is currently the bright spot in the global economy, enjoying healthy growth at a time when every other major economy is struggling.

Economic growth in the Eurozone has been stagnant for a year now, the United Kingdom and Japan have already fallen into technical recessions, and China is slashing interest rates to deal with the fallout in its property sector.

Purely in terms of economic performance, the US is miles ahead of the competition. This has started to translate into an interest rate advantage that benefits the dollar. From a historical perspective as well, the dollar often does some of its ‘best work’ in this type of environment - when the global economy is weakening but the US is still in good shape.

One factor that has prevented the dollar from appreciating more significantly is the cheerful tone in stock markets, which has dampened demand for safe haven assets. As such, a correction in equities might be the missing ingredient for the dollar to shine brighter.

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