Fed minutes – exit talks

Everything concerning the Fed’s policy used to be seen as the dollar negative as of late. Little wonder yesterday’s minutes were perceived as an opportunity for the markets to sell the US currency and for the European pairs (mostly EURUSD and GBPUSD) to recover some losses from two previous weeks.

Meanwhile the dollar advanced after the release as the minutes included an extensive discussion on exit strategies from a current ultra dovish policy. While the Fed decided to keep reinvesting proceeds from the portfolio (thus maintaining the stance at full expansion) and Bernanke was very dovish at the (first in the history) conference, the discussion showed that some members of the Committee were clearly uncomfortable with his line of reasoning. The minutes contain suggestions that the Fed should initiate an exit strategy sooner than currently expected on the market and that this exit should include (announced) sales of assets from the portfolio.

While those remarks might seem surprisingly hawkish, few things are worth noticing:

• The Chairman’s view is the key one and while some members at the FOMC might have differing views (Plosser, Fisher), none of them dissented from the statement    
• The meeting took place before a series of downbeat economic data; those figures took some ammo from Bernanke’s critics’ arsenal and most likely reinforced reluctance of the Chairman to begin tightening
• EURUSD was gaining for nearly three days and therefore a negative reaction to the minutes is more a profit-taking move rather than a sign that investors really became worried of sooner (than previously expected) tightening.

GBPUSD – more of the downside?

In yesterday’s comment we suggested the cable might have been up for a test of 1,6165. The pair indeed tested that level and moved lower as the minutes from the BoE meeting showed the Bank is in no hurry to increase interest rates despite rising inflation. On H4 the pair continues the march within a downward channel and might be eyeing a psychological 1,60. On the other hand, we have a support on a larger picture (W1) slightly above that level – the trendline. That’s a double edged sword – the bulls may use it and bounce back but if it gets broken, declines will accelerate.

Events to watch – US data, UK retail sales

After a one day off we return to the US macro with a couple of important releases. The key one might the Philly Fed activity index (10.00 ET, 16.00 CET, consensus 20 pts.). Philly Fed is just a regional activity indicator – usually a second tier figure at best. However, this time it is worth watching as the index fell sharply in April and the decline was sort of confirmed by more relevant ISMs and output data. Initial claims (8.30 ET, 14.30 CET, consensus 420k) are crucial too, as they have suggested recently the improvement on the labor market might have stalled. On top of that we have retail sales data in UK (4.30 ET, 10.30 CET, consensus +0,7% m/m) and used home sales in the US (10.00 ET, 16.00 CET, consensus 5,2 mln).   

Przemysław Kwiecień PhD, Chief Economist

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