US dollar awaits FOMC minutes

FX traders head into this evening’s release of the minutes from the March FOMC meeting with further broadening in USD weakness. Although the US dollar index is only at a 2-week low, the US currency has fallen for 3-4 consecutive sessions against EUR, JPY, GBP, CHF and CAD.

Will the release of the minutes trigger a short-term relief in the USD?

After all, those are the minutes from the meeting, which triggered an all-round positive USD-reaction mainly due to the FOMC announcement, which showed five members expecting 1.0% fed funds rates by end of 2015, three more than those projecting a similar outcome in the December meeting.

The projections also meant that median projected fed funds rate for the end of 2015 has moved up to 1.0% from 0.75% in the December meeting.

While USD bulls may point to the aforementioned hawkish projections on the basis that the minutes will issue a more detailed explanation of the forecasts, USD bears could point to the FOMC’s removal of the 6.5% unemployment forward guidance in favour of “…a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.”

“Extraordinary” support offsets Fed Funds  projections

The dropping of unemployment forward guidance reminds us that the Fed will retain discretion over the timing of tightening and, as was described eight days ago by Yellen, the US economy will continue obtaining “extraordinary commitment… for some time”.

In fact, those comments have more than offset the impact of the hawkish fed funds projections and helped trigger the latest round of USD-selling against G10 and emerging market currencies.

No Yellen misinterpretation this time

Recall that the March 28 rally in the USD was partly caused by Yellen’s suggestion in the post-announcement press conference that it could take about six months between the termination of tapering and the next rate hike. It’s unlikely we will find such candor in the minutes, which may end up being overall USD-negative.

FX traders have got into the habit of seeing reversals in the USD on days of FOMC announcements, FOMC minutes and Fed speeches.

The latest selling in USD has been enforced by those “extraordinary” comments from Yellen as well as factors relevant to the individual currencies (calming of easing chatter from ECB, strong manufacturing figures in UK, BoJ held fire on additional stimulus, positive BoC survey and higher-than-expected CPI in Switzerland).

Thus, any knee-jerk bounce in USD from the minutes is likely to be exploited as a renewed opportunity to build longs in EUR, GBP and AUD, while USDJPY may wait for support near 101.20-30.