USD: Watch ADP and FOMC Minutes Today
The New Year begins when investors get a big picture of the global economy. Equity markets remain close to their highs, industrial commodity prices are rising slowly, and yield curves are experiencing some downward steepening – moves typically associated with growth. OPEC + ‘s decision to resume supply increases from February also looks like a vote of confidence in the history of demand, even as Asia and its zero tolerance stance towards Covid-19 creates pockets of pessimism (as it did last year).
Fortunately, the US economy appears to be in good shape, which keeps the Fed normalization story and that of the strong dollar alive. We’ll see more updates on this later today, when the December FOMC meeting minutes are released. That meeting was about as hawkish as it gets, suggesting an accelerated reduction in the Fed’s quantitative easing activity and a median expectation of two rate hikes in 2022. It was notable yesterday that the Fed’s dove, Neel Kashkari said he was in favor of two Fed rates. hikes this year.
Perhaps for some dollar bulls, the dollar’s performance since this FOMC meeting has been disappointing. Yes, the USD / JPY has hit a new high (rising energy prices likely played a role here), but the broader trade-weighted dollar measures are still 1% lower than the highs seen late November. Notably, the market has struggled to price the Fed Funds rate cycle above the 1.50 / 1.60% area over the next two to three years – raising the question of whether everything has been assessed for the Fed Tightening History?
We believe it’s too early to declare the dollar’s uptrend over, but recognize that some consolidation at higher levels may allow other stories to unfold. This appears to be the case with the strong performance of the British Pound and some CE4 currencies in recent weeks after the BoE pulled the trigger in December and the central banks of the Czech Republic (see below), Hungary and of Poland have all accelerated their tightening cycles. . These trends are expected to continue in the short term.
For today, we expect the DXY to remain supported in the middle of its 95.50-97.00 range and take inspiration from the December ADP employment figure released at 1415 CET, then FOMC minutes. published this evening.