FOMC Minutes Preview & DXY

Hawks continue to argue whether there will be a 25 or 50 basis points hike at the next Fed meeting. The last meeting’s minutes could be another important clue which way it goes.

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Calculating the odds

Markets will be going over the minutes of the last FOMC meeting for clues about what will happen at the next meeting. Monday's emergency meeting did not shed any light whatsoever. Several traders got disappointed thinking that the Fed would go for an emergency hike. Following the non-event, people are back to placing their bets on whether the Fed will raise rates by 25 basis points or 50.

The latest poll by Reuters shows a majority in favor of a "double" rate hike, 52% in favor, while 48% believe it will only be 25 points. CME's FedWatch tracker is more dramatic, with 2:1 odds that the Fed will raise rates by 50 basis points. This calculation is based on forward interest rates' position and reflects where market makers are putting their money.

The flip side

It is common for the markets to get ahead of themselves so its possible that the minutes could act as a reality check. As most economists price in "two" rate hikes, there isn't much room for a surprise on the hawkish side unless the Fed favors a faster balance sheet taper. FOMC members are likely to have been at least rhetorically more measured, and the result could be interpreted as unexpectedly dovish.

When the last meeting was held we still didn't have the Q4 GDP numbers, the latest inflation figures, or the newest NFP numbers in January. At the time, it wasn't ‘a sure thing’ that the Fed would raise rates at the next meeting, and that same sentiment could be reflected in the minutes.

Another possibility is that the consensus could be so strong for a rate hike that the minutes will either be used as confirmation if hawkish or dismissed as stale if dovish.

DXY biased upwards

Since the Fed turned more hawkish at its last meeting, the dollar index rose some 1.5% to 97.50 but quickly reversed course. After plummeting around 2.5%, it found support at the 100-day average just above the 95 hurdle, only to rise another 1.30% to 96.50. Price action remains indecisive but biased up indeed.

If the Fed is hawkish, DXY could find support at the 50-day average of 96, where it currently trades, and continue to rally to the top. If the Fed is neutral, the index could fall back to its 100-day average and 94.6 if it is dovish.

Source: Spreadex Trading Platform

Key takeaways

First and foremost will be any explicit talk of accelerating the pace of rate hikes, including a 50 basis point move in March. St Louis Fed chief James Bullard has expressed this view publicly since the meeting and may have raised it at the last meeting, so it will be interesting to see how many would have shared this view if he did.

No mention of rate hikes could mean the minutes are a damp squib although news of a date to start the rolling off the balance sheet could also move markets.