A more hawkish Fed - what to expect from the minutes?

The FOMC Minutes out on Wednesday evening 7pm GMT should shed further light on the FOMC’s thoughts towards the inflationary picture. It will be interesting to hear more detail on this given the quite punchy upward revisions to their inflation forecasts. Traders will also be on the lookout for any clues on kick-off for rate hikes occurring earlier than expected as this could lead to a more hawkish repricing in Fed Fund Futures. This would be dollar positive. So far the market and Fed are in agreement for the number of rate hikes over 2022, where the divergence begins to open up is through 2024 and even further out (terminal rate). Another interesting factor which got little airtime at the December meeting was the idea of balance sheet runoff i.e. winding down the assets on the Fed’s books. At the moment the plan is to reinvest the proceeds from mature debt, however, this could be changed on a quicker recovery in the labour market and stickier inflation.

We know there has been a reassessment on the committee towards inflationary pressures as they officially removed the word “transitory” from their statement. Additionally, Powell even suggested the threshold for maximum employment required to lift rates may have already been met. The assets to keep on your radar for any volatility as a result of this event are the dollar FX crosses such as the yen, gold and equity markets.

USDJPY:

Yen is getting destroyed as a culmination of factors work against the Asian currency. The US 10-year yield which it shares a very close correlation with has been increasing aggressively with a circa 12bps move yesterday and this has followed through today with a smaller but still circa 4bps move higher. This hurts the yen. Lastly, risk-on removes the demand for a safe haven currency like the yen and leads to capital flowing to higher beta assets.

(Source: TradingView - Past performance is not indicative of future performance.)

The 116 resistance level has been breached and most likely triggered some stops as it sliced through this key level. Also, broke above its upper trend line of the ascending channel. The RSI is in overbought territory so we could see a minor pullback to the 116 round number before the next journey of travel. Price is also quite substantially above its 50-day SMA. Potentially some mean reversion? But the upside momentum is strong. Targets wise 116.5 and 117 on the upside would be interesting, on the downside 116 and the former range high of 115.5.

Gold:

Gold is clearly on the backfoot with the increasing interest rate theme. Real yields have also moved higher which leads to the opportunity cost of gold rising and hence outflows. Price is now right on the key $1800 support level, which could be breached should the Fed minutes be received hawkishly by the market. The RSI was rejected at the 62 mark and is now around the 50 area. Gold has basically been in a range between $1750 and $1830. With all the moving averages bunched up like this, they aren't of much informational value.

(Source: TradingView - Past performance is not indicative of future performance.)