Minutes and data
Yesterday saw the release of Federal Reserve minutes as well as the latest US inflation data. Both publications had been eagerly awaited by the market. The minutes were closely watched for their ability to confirm Treasury pricing and provide a control to traders’ understanding of sentiment at the Fed. Inflation data of course was anticipated to add to the picture of whether central bank policy tightening was having any impact upon inflation. Let’s start with the inflation data. Data released yesterday showed inflationary pressures in March fell to their lowest levels in almost two years. That would have been a great success for the Fed had core inflation lurking behind the headline not been stubbornly high. Given that it was CPI inflation released yesterday and not the Fed’s preferred measure of PCE, the fall in nominal inflation was insufficient to downgrade rate hike expectations more meaningfully.
So with EURUSD pushing back towards the highs of 1.10 yesterday, what was the catalyst for such a move and the key to any further short term weakness? To answer that let’s turn to the Fed’s minutes. Reflecting upon the most recent March meeting of the US monetary authority, the publication revealed new concerns within the governing board, the FOMC. Whilst it did helpfully reveal that most members of the Committee still believe there is a need for continued tightening, notably a 25-basis point hike at their next gathering, the peak of rates appeared to have fallen. The message received from this was that despite the job not being over, it wouldn’t have to go on for as long as previously expected.
Whilst that was the overall take away, a closer look at the minutes revealed cause for concern and ultimately sealed the US Dollar’s fate yesterday. Many officials contrary to market expectations opted to forgo a hike at all in March. This built up expectations that Fed officials could do away with the hiking cycle quickly given sustained pressure in the banking sector. To reverse any further USD weakness, the path of curve inversion over the next few weeks will be closely watched with the 2s/10s spread expected to narrow in an environment of falling inflation.
Discussion and Analysis by Charles Porter
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