The minutes of the Fed's last meeting, published yesterday, was not surprising: the rhetoric of the regulator's members was expected and fully fit into the outline of the accompanying statement, which was made public following the results of the January meeting. The US dollar reacted accordingly, actually ignoring the release. The EUR/USD pair remained within the level of 1.13, although both bulls and bears made attempts to depart from it.
It is worth noting that the published "minutes" of the Fed turned out to be both on the side of buyers and sellers of the pair. Each side could find their own arguments in this document in favor of the US dollar's growth or decline.
The results of the Fed's January meeting turned out to be in favor of the US currency, even despite the high level of expectations. The hawkish mood of Jerome Powell exceeded all expectations: the Fed Chairman surprised us with his decisiveness and straightforwardness. In particular, he allowed the option of raising interest rates at every meeting this year. At the same time, Powell focused his attention on the strengths of the latest macroeconomic releases. In particular, he said that "labor market conditions correspond to maximum employment", inflation remains "significantly above" the Fed's long-term target, and the economy as a whole is showing "very strong performance."
Given such rhetoric, traders' hawkish expectations have increased significantly. Goldman Sachs said that the regulator will increase the rate six or seven times in 2022. Moreover, the market began to actively discuss the option of more aggressive rates of monetary tightening after the release of US inflation data for January. The idea was inspired by the head of the St. Louis Fed, James Bullard, who has a vote on the Committee this year. In his opinion, the Fed should raise the rate by 50 basis points at once at the March meeting, and by another 50 points by the beginning of July. In anticipation of the publication of the Fed's minutes, some of Bullard's colleagues (Daly, George, Barkin) expressed doubts that the regulator needs to raise the rate at such an active pace. They put some pressure on the US dollar with their rhetoric, including when paired with the euro. But at the same time, the USD bulls keep their line, as the position of other Fed officials on this issue remains unknown.
The Fed's "minutes" could swing the pendulum one way or the other, but that did not happen. The minutes somewhat disappointed the EUR/USD bears but did not inspire the pair's bulls either. Therefore, after short-term price surges, the pair returned to the middle of 1.13, where it stayed before the publication of the document.
After the results of the January meeting, Fed members agreed that the pace of rate hikes this year will differ from previous similar cycles. The document states that the members of the Committee consider it appropriate to raise rates faster than after 2015 but on the condition that inflation does not decrease. We are talking about three years of rate increases from December 2015 to December 2018. The pace of monetary policy tightening during this period was indeed quite measured. The rate was initially raised in December 2015, then in December 2016, followed by February, March, June, July, September, and December 2017; and then in March, June, September, and December 2018. During this period, the rate was raised from 0.25% to 2.5%.
Judging by the tone of the published minutes, the Fed is really ready to raise the rate this year at every meeting, especially if the US inflation continues to show upward dynamics. However, as for the simultaneous 50-point increase in the rate at the March meeting, the intrigue remains here, since this issue was not discussed at the January meeting.
It should be noted here that the minutes do not indicate many circumstances that would make it possible to understand the alignment of forces in the Fed camp. For example, we do not know exactly how many representatives of the Fed supported the idea of reducing the balance sheet. The document only states that "several leaders believe it is possible to start reducing the balance sheet of the US Central Bank later this year." At the same time, the pace and timing of the reduction will be determined at the upcoming meetings.
In other words, the "minutes" published yesterday did not support traders of the EUR/USD pair - neither buyers nor sellers. Therefore, the focus was on geopolitics again, which keeps the market participants in good shape this week. In particular, the Reuters news agency quoted representatives of the "LNR" this morning, who accused the government forces of Kyiv of using mortars.
In the context of the currency market, it does not matter at all whether the reports of the White House or the LNR are true: the very fact of the escalation of the situation allows the US dollar to remain above as a protective tool. Therefore, the positions of EUR/USD buyers in the current conditions look much weaker, although the pair is trading in a wide-range flat, within the 13th mark.
We believe that the pair's upward impulses can still be used as an excuse to open short positions. The resistance level is 1.1400 (the upper border of the Kumo cloud on the D1 timeframe), while the support level is 1.1305 (Kijun-sen line on the same timeframe). This target is the goal for the downward movement since it is too early to talk about breaking through the 1.12 area.
