FOMC Might Reveal How Many Hikes Remain

With the Fed expected to slow or stop its rate hiking cycle, analysts will be looking through the FOMC minutes to see just how many more hikes are left.

Minutes to Contradict JP Tone Again?

Following the November FOMC meeting, Fed's Jerome Powell struck a somewhat hawkish tone, insisting that more hikes were coming. This came at odds with the market's expectations. Two weeks later, when the minutes came out, it showed that the committee members were slightly more dovish in their internal discussion than the initial messaging conveyed. Now, there is a question of whether a similar situation will happen with the December meeting.

The last time the FOMC met, they agreed to raise rates by 50bps, as had been foreshadowed by JP. At the same time, the dot plot was released, showing that members expected rates to go above 5.0% overall. The Fed Chair also struck a similar tone, suggesting that rates might not go
up as fast in the future but would go higher than the market anticipated. At the time, markets were pricing at a terminal rate of less than 5.0%, though.

Post-FOMC Silence Weighs on Impact

The question now is if the release of the internal deliberations will contradict the more hawkish tone provided by Powell after the December meeting. The minutes are likely to have a more significant impact than usual this time around because members have been mostly silent since
the monetary policy decision, primarily because of the holidays.

Now that inflation is coming down, but the Fed still forecasts it will remain above target for at least another two years, the issue of addressing the labour market might return to the fore. The Fed has a dual mandate to maintain "full employment", but now it is facing the problem in reverse: A tight labour market puts upward pressure on wages, which could leave inflation higher for longer. This "stickiness" of inflation might be a challenge in the coming months, as the extraordinarily high inflation comes down with the price of energy, but core inflation remains elevated.

GBP/USD

Cable has broken the critical support level of $1.20 (R1) early on Tuesday, bringing $1.19 (S1) and $1.1765 (S2) into the spotlight. Either could act as neckline support for a potential head-and-shoulders pattern. If the FOMC minutes indicate a more hawkish stance on future hikes, the
pair could fall towards $1.15 (S4), with interim support at $1.1650 (S3). In a dovish case, the chances of forming the right shoulder will increase, opening the door to $1.2150 (R2). Traders should keep a keen eye on the $1.2350 (R3) potential shoulder as well should momentum rise.

Key takeaways

Analysts will examine the FOMC minutes from the December meeting for insight into the cycle's remaining rate hikes. There is a question of whether they will contradict the tone conveyed by Jerome Powell again. This time around, the minutes are expected to have a more significant impact due to the post-FOMC silence from members.