FOMC Minutes stabilise the dollar, for now

Markets have steadied overnight after Wall Street found a bid in another choppy session. Gains picked up in equity markets through the day, with the S&P500 and Nasdaq both posting decent returns. European bourses have opened up mildly in the green, while the dollar is trading mixed after last night’s FOMC Minutes sprang few surprises.

The minutes from the Fed meeting held in early May had culminated in a 50bp rate hike, the biggest jump in 22 years.  Most officials backed 50bp hikes at the next couple of meetings and all participants agreed a half-percentage point rate hike was appropriate this month. They also discussed the chance of “restrictive” policy through more aggressive increases. However, they worried that this could undermine the strong recovery in the jobs market.

There appears to be a clear lack of uncertainty of what needs to be done in the near-term. The Fed is clearly keen to get back to “neutral” by front-loading and will reassess its options in the summer. By the time the FOMC gets to September, they will have plenty more economic data to make their next move, which means they continue to maintain optionality. Market pricing didn’t change a great deal, with the next two Fed meetings locked in with two 50bp moves. The 60% chance of a 25bp move in September remains.

Mixed US economic picture

Of course, since the meeting, much has changed. US stock markets have dropped a further 8% or so while the trend in domestic data suggests the economy may be weakening more quickly than anticipated. Witness the recent fall in new home sales as higher mortgage rates begin to weigh on the consumer. Tomorrow’s personal consumption and core PCE deflator figures for April are expected to support the economy and prove it is strong enough to withstand “expeditious” policy tightening and rate hikes.

Projections for policy tightening have also corrected since early May. Indeed, there was no mention of a big 75bp rate hike in the Minutes so that call is off the table. The Fed’s terminal rate, the point at which the Fed Funds rate peaks, has fallen back below 3%. This has seen the dollar retrace from its 20-year highs when the Dollar Index printed above 105. The greenback should remain underpinned as the rate hike cycle stays in place, though other countries around the globe are narrowing that spread between interest rates which is bolstering their currencies. This week’s low in the DXY at 101.64 could be key support.

Gold hits resistance

The tailwinds seem to be lining up in the yellow metal’s favour. These include a softer dollar, weaker economic data, Wall Street getting beaten up and concerns over a central bank policy mistake pushing the US into recession. And yet, the bid in gold has been fairly lacklustre with a focus remaining on elevated yields.

Technically, the downtrend from the April high at $1998 remains intact for now. The recent pullback from the low at $1786 has taken us back to $1868 resistance. This is the 38.2% Fib retracement of the recent 210-dollar correction in April-May. The 200-day SMA is $1839, while above lies the 100-day SMA at $1886 and the 50% retrace at $1892.