Dollar Breaking Out after Fed Minutes, Yen Recovering

Reaction to FOMC minutes overnight was relatively muted with major US indexes closing mixed, while 10-year yield dipped slightly. Dollar, however, is making some progress by breaking to the upside against Euro. But momentum of the greenback is so far rather weak. At the same time, Yen is trying to recover against Europeans and commodity currencies, in a limited way.

Technically, one focus for the rest of the month would be whether Yen’s rebound could gain more momentum. AUD/JPY’s recovery from December low at 87.00 is so far rather corrective looking. Downside momentum has been diminishing since late January, as seen in 4 hour MACD. While another rise cannot be ruled out, upside will likely be limited. On the other hand, break of 90.21 support will suggest that the recovery has completed and bring retest of 87.00 low.

In Asia, at the time of writing, Hong Kong HSI is up 0.54%. China Shanghai SSE is up 0.07%. Singapore Strait Times is down -0.83%. Japan is on holiday. Overnight, DOW dropped -0.26%. S&P 500 dropped -0.16%. NASDAQ rose 0.13%. 10-year yield dropped -0.032 to 3.923.

FOMC minutes: A few participants favored 50bps hike

Minutes of January 31–February 1 FOMC meeting reveal that “almost all participants agreed that it was appropriate to raise the target range for the federal funds rate 25 basis points at this meeting.”

“Many of these participants observed that a further slowing in the pace of rate increases would better allow them to assess the economy’s progress… as they determine the extent of future policy tightening that will be required.”

Yet, “A few participants stated that they favored raising the target range for the federal funds rate 50 basis points at this meeting or that they could have supported raising the target by that amount.”

While there are more speculations regarding a revert to 50bps at March meeting, 25bps is still the majority of bets. For now, fed fund futures are pricing in 76% chance of another 25bps hike in March, and just 24% for 50bps.

Fed Williams: Our job is clear to restore price stability

New York Fed President John Williams said yesterday at a conference,”Our job is clear: our job is to make sure we restore price stability, which is truly the foundation of a strong economy.”

Williams noted that the global supply chains are still disrupted, thus, “although goods prices have come down in last several months, there are signs this may not go as quickly as hoped.”

At the same time, inflation in core services, excluding food, energy and shelter, remains far too high, as driven by excessive demand relative to supply.

RBNZ Orr: Cyclone rebuilding could add 1% to GDP over coming years

RBNZ Governor Adrian Orr told Bloomberg TV that rebuilding after the damage by cyclone Gabrielle is expected to boost activity and raise price pressure. There is a risk that OCR might be required to stay higher for longer as a result.

“We’re looking at about a 1% addition to GDP over coming years,” Orr said. “That is well manageable within the current monetary settings. But if inflation expectations continue, if core inflation is more persistent, then tighter for longer is certainly an outcome.”

On the other hand, some of the global downside risks are “actually assisting on the inflation battle,” Orr noted. “Economies are evolving broadly as  anticipated, excluding these ongoing shocks. So I’m very confident that low and stable inflation will return.”

Looking ahead

Eurozone CPI final is the only feature in European session. US will release jobless claims and GDP revision later in the day.

EUR/USD Daily Outlook

Daily Pivots: (S1) 1.0581; (P) 1.0623; (R1) 1.0646; More…

EUR/USD’s corrective fall from 1.1032 resumed by breaking 1.0610 temporary low. Intraday bias is back on the downside. Further decline should be seen to 38.2% retracement of 0.9534 to 1.1032 at 1.0463. Strong support should be seen around there to bring rebound, at least on first attempt. On the upside, above 1.0703 minor resistance will turn intraday bias neutral first. But risk will continue to stay on the downside as long as 1.0803 resistance holds.

In the bigger picture, the rally from 0.9534 low (2022 low) is a medium term up trend rather than a correction. Further rise is in favor to 61.8% retracement of 1.2348 (2021 high) to 0.9534 at 1.1273 next. This will remain the favored case as long as 1.0482 support holds.

Economic Indicators Update