FOMC minutes - what to expect in the dollar?

The main event coming up on the hour for today is the FOMC minutes.

While there is a great deal of focus on the Fed again die to their renewed hawkishness when they increased rates for the first tie on over a decade and signaled for more hikes than previously announced and proposed by their dot plot, the market has pilled into the dollar which has run up 14 year highs this week on the back of better than expected data and a more positive outlook for GDP Q4 as a result.

Analysts at Bank of Tokyo Mitsubishi argued the details of the minutes may prove important for the markets as well, adding that Yellen has already told us that some of the FOMC altered their end-2017 fed funds estimate based on expectations of fiscal expansion under President-elect Trump even though we don’t know what that might amount to, suggesting that it might not take much for the median to drop back again - hence, what is more important to us in reading the minutes will be any changes to the assessment of the economy that are beyond Trump’s fiscal influence. 

Further Quotes:

"That would be more meaningful and suggest resilience in the Fed’s thinking on a faster pace of tightening even if Trump was to disappoint on the fiscal side."

"It is also worth remembering that the voting FOMC members have changed and hence the DOTS might not reflect the more dovish voting in 2017 relative to 2016. Out go Fed Presidents George, Mester, Bullard and Rosengren and in come Evans, Harker, Kaplan and Kashkari. Three of those four 2016 Presidents (all but Bullard) voted to hike last September and hence the incoming 2017 Presidents are likely to have a more dovish leaning than last year’s."

"The median DOTS message needs to be viewed in the context of not knowing which DOTS belong to which Presidents. Our hunch is that the minutes might reveal a greater degree of caution over the outlook for the economy than one might expect given the DOTS increase for this year."

What to expect in the dollar?

The US dollar has already broken 14 year highs of late, although has given back some ground and is testing the downside of the 102 handle after hitting highs of 103.44 earlier in the day. Given the hawkishness in the press conference and projections that the market has already been given, it would be hard for the dollar to really take off from these minutes and what we now need to see is follow through from the Fed before the market will be further convinced on rhetoric, as we casts minds back to 2015's projections where four hikes were expected but only one came in Dec 2016. A test below 102 and the late Nov highs could prove significant if the level gives way with a quick retracement to 101.50 while to the upside, 103.80 needs to give out for a further bid onto the 104 handle.