- EUR / USD fell back to 1.1300 from the 1.1340 zone on the back of Fed Minutes leaning towards the aggressive side.
- Although the Fed’s Waller gaped about a more aggressive QT in December, markets seem surprised that many Fed members seemed to agree.
- Despite this, USD bulls remain shy and may need the green light of higher long-term returns to continue the 2021 bull run.
The EUR/USD plunged following the release of the latest Fed Minutes. The pair, which traded closer to 1.1340 previously, is now trading at 1.1310 and is targeting a retest of the 1.1300 level, although it is still trading with gains of around 0.2 % or more than 20 pips on the day. For now, the 21-day moving average at 1.1307 offers support. But if the aggressive tone of the latest Fed statement can lure more dollar bulls out of harm’s way, the EUR / USD may be on its way to break below the big figure and a test of this week’s lows below. 1.1280, which also matches last week’s pre-New Year lows.
To sum it up, the latest FOMC Minutes were more aggressive than expected on several fronts. Echoing aggressive statements made by Fed Governor Christopher Waller last December, all participants favored starting the quantitative adjustment (QT) earlier than expected and many were of the opinion that the second round should proceed faster. In other words, the Fed appears to be leaning more toward a more aggressive quantitative adjustment, which, although Waller hinted at this in December, seems to have surprised some. Meanwhile, some Fed participants commented that there might be circumstances in which it would be appropriate for the committee to raise interest rates even before full employment has been reached. This is the first time since the Fed’s 2020 framework review when Fed members have favored sacrificing progress on their employment target to meet the inflation target.
However, for now, even though US bond yields, particularly on the short end, have rebounded in the wake of the Minutes, USD bulls remain shy. For reference, US 2-year yields are now up 6 basis points on the day, decisively above 0.80% for the first time in the post-pandemic era. 5-year yields rose more than 5 basis points above 1.40%, putting them back at pre-pandemic levels for the first time. However, long-term US yields, such as 10-year and 30-year, moved little, which could explain the lack of enthusiasm seen in the USD. The 10 gained roughly 1bps after the minutes but are struggling to break above 1.70%, while yields at 30 reais have moved about 1bps lower since the FOMC Minutes.
The lack of enthusiasm to drive higher long-term yields alongside short-term returns in the wake of aggressive Minutes suggests that bond market participants are not convinced that the more aggressive approach to rate hikes and Balance reduction constitutes long-term economic growth and policy maximization. Bond markets may need to show a little more faith in the Fed’s ability to reassert itself without hurting long-term growth (thereby increasing long-term returns) for the dollar to rally sustainably.
Technical levels
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