The minutes of the FOMC's April meeting published on Wednesday caused volatility to increase, US dollar to strengthen, quotes of raw materials to make a downward pullback, primarily oil and industrial metals, and Treasury yields to rise. The reason is that traders evaluated the minutes as a hint that the Fed may revise its rate forecasts earlier than the market consensus suggested.
The key phrase in the minutes states: "Several participants suggested that if the economy continues to move rapidly towards the Committee's goals, it may be appropriate to start a discussion on a plan to adjust the pace of asset purchases." It is clear that this phrase does not mean that the adjustment can begin at the June or July meeting of the FOMC, but still, the inclusion of such a promising passage in the minutes is clearly conflicting with J. Powell's recent comments.
It can be said that the market thinks that the Fed may need to normalize policy earlier and, perhaps, more aggressively, because the discussion of the plan to gradually reduce stimulus by "several participants" simultaneously implies the risks that inflation forecasts will be raised. In addition, the minutes were published after the release of inflation data, which means that the fears of these very "several participants" may turn out to be deeper.
Consequently, the markets regard the minutes as an acknowledgment that the Fed will start changing policy earlier. If these suspicions strengthen, then the US dollar can make an upward reversal, and commodity currencies will be under pressure. However, it is too early to talk about this.
EUR/USD
Eurozone's core CPI increased by 0.7% y/y, less than in the United States. The recovery in consumer demand is delayed as coronavirus restrictions in Europe have been deeper and longer due to the slow pace of vaccinations.
The ECB emphasized in its semi-annual financial stability report released on Wednesday that the growth prospects in the US are higher than in the EU, which caused nominal yields to rise, which, however, is more than offset by high inflation. According to the ECB, one of the key risks is that the euro area will lag behind the pace of recovery from advanced economies, as it may take longer to achieve collective immunity in the Eurozone than in the United States or the United Kingdom.
But something is suspicious here. Most likely, the ECB is only trying to contain the demand for the euro, since if Europe was really concerned about the slow pace of vaccination, it would have allowed the use of Sputnik-V long ago, whose certification is artificially delayed.
The euro made a small downward correction after the publication of the FOMC minutes, but the pullback was not deep, and growth resumed this morning. The nearest target is 1.2350, then the resistance zone of 1.2520/50. It is possible to reach this in the coming days.
GBP/USD
UK's macroeconomic data continues to support bullish activity for the pound. The labor market report came out better than expected. In April, the number of applications for unemployment significantly declined and the unemployment rate fell from 4.9% to 4.8%. Prices are also growing steadily, with inflation at 1.5% yoy in April against 0.7% in March. The producer prices are showing strong dynamics.
The increase in production prices indicates not only the recovery of industry, but also the growth of demand, which will affect the growth of consumer inflation one way or another. So far, the development of the situation does not imply urgent measures on the part of the Bank of England, which also traditionally lags behind the Fed in its actions. Therefore, any actions to change the monetary policy is not expected, which means that there is no reason to revise the forecasts at least until the Bank of England's next meeting.
The pound reached the target of 1.4222 set on Monday, and speculation about a possible change in the Fed's policy is unlikely to prevent the pound from going higher. The bullish momentum is strong, so there is a high probability that the three-year high of 1.4375 will be tested successfully. The conditions for a downward correction is still early to discussed.
