Week in FX: FOMC Minutes Show December Rate Hike on Track

The Notes from the October FOMC signal the Fed is gearing towards the first rate hike in a decade.

The USD finished the week higher against the majors, except the AUD after the Reserve Bank of Australia published the minutes of its November 3 monetary policy meeting and ruled out further rate cuts. The Federal Reserve also published the notes from the Federal Open Market Committee (FOMC) meeting in October. The latest FOMC marked a turning point for the USD as it brought back the possibility of a rate hike in the last policy meeting of the year for the American central bank. Subsequent statements from Fed members, a strong non-farm payrolls and soft retail sales and inflation have paved the way forward to the first U.S. benchmark interest rate hike in 10 years.

The October FOMC meeting was not followed by a press conference so the market had to seek guidance from the prepared statement published immediately afterwards and the minutes that were published two weeks later. The minutes were released on Wednesday, November 18 and confirmed the Fed’s strong signal for a December rate hike. The market had a subtle reaction to the release of the minutes given some of the remaining debate as some members cautioned that raising rates too early could cripple the momentum of the U.S. economy. While the timing of the first rate hike was under discussion, the focus will now shift to the pace of rate increases next year, and on that front the comments painted a dovish picture to which the USD reacted with losses.

Central banks have influenced market pricing and on Friday European Central Bank (ECB) President Mario Draghi reinforced one of the biggest drivers of current market conditions. The ECB President talked about his readiness to do what is needed to boost European growth, this of course means stimulus. The divergence between easing in Europe and the tightening expectations in the U.S. pushed the USD higher versus the EUR which fell more than 6 percent.

Next week will have less trading activity than usual as there is less releases on the economic calendar with holidays in Japan and the U.S. reducing liquidity in the markets. Preliminary French and German PMIs will e published on Monday, November 23 at 3:00 and 3:30 am EST. The US will release its second GDP release for the third quarter on Tuesday, November 24 at 8:30 am EST. Unemployment claims in the United States will be published a day earlier than usual on Wednesday, November 25 at 8:20 am EST.

Forex market events to watch this week:

Monday, November 23
3:00 am EUR French Flash Manufacturing PMI
3:30 am EUR German Flash Manufacturing PMI
Tuesday, November 24
4:00 am EUR German Ifo Business Climate
4:05 am AUD RBA Gov Stevens Speaks
8:30 am USD Prelim GDP q/q
10:00 am USD CB Consumer Confidence
Wednesday, November 25
8:30 am USD Core Durable Goods Orders m/m
8:30 am USD Unemployment Claims
4:45 pm NZD Trade Balance
7:30 pm AUD Private Capital Expenditure q/q
Friday, November 27
4:30 am GBP Second Estimate GDP q/q

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza