Will FOMC Minutes Stray from the Beaten Path?

In today’s economic climate, central banks are never too far away from the heart of any forex move, and again overnight has been no exception. Monetary policy guidance, economic reassessment, and policymakers’ outright voting results are influencing forex price direction. The Bank of Japan (BoJ) held center court throughout the Asian session. In Europe, the Bank of England (BoE) is hugging the limelight, at least until the Federal Reserve dominates proceedings in the late North American session with the release of the Federal Open Market Committee (FOMC) minutes. The bulk of the market’s investor and dealer responses are expected to come this afternoon, after the FOMC minutes release.

FOMC Expected to Make Some Noise

On the last FOMC go-around in early October, the U.S equity market managed its biggest rally of the year. That was because the market heard that day a more dovish tone than it had expected after the September meeting. Today, Fed watchers are looking for elaboration on a number of points, especially employment and inflation. The market will be expecting the usual range of opinions to be offered up — global development and inflation concerns. The varying views are likely to be balanced by discussion of removing the “considerable period” language and downplaying oil-related softness in headline inflation (the weak energy prices are also helping – think of it as a form or stimulus). The market remains overtly bullish on the U.S. dollar, but it has sought a strong enough reason to kick-start the dollar’s next leg higher. Will investors get that reason later today? Currently, the 18-member single unit remains in a corrective mood (€1.2535) following the stronger-than-expected German ZEW consumer-confidence survey yesterday, and dealers suspect that it has the potential to continue for the time being, unless the Fed has something to do with it.

“Old Lady” Sets Sterling Alight

This morning’s BoE November meeting minutes were not as dovish as expected: the vote remained 7-2 to keep policy steady at +0.5%. The minutes offered a subtle hint at deepening divisions among the seven-member majority led by Governor Mark Carney. There was a “material spread of views” on the balance of risks to the outlook among members who voted to hold rates. Some Monetary Policy Committee (MPC) members expressed concerns about overshooting the bank’s inflation target if wages pick up. Also, some MPC members noted signs that slack was being absorbed sharply and could fuel inflation. The minutes imply that the consensus to keep rates on hold could weaken if the U.K. economy continues to expand strongly, strengthening the minorities’ push for tighter policy. Currently, fixed-income traders are pricing for the BoE to hike rates in the latter half of 2015.

While this month’s Quarterly Inflation Report saw the MPC effectively support market pricing of an October 2015 rate hike, the BoE (similar to other major central banks) is as data dependent as it has ever been. Investors should be expecting greater volatility going forward as the market tries to pin the BoE down to a rate hike timetable. Comments from any BoE hawk or dove will surely keep the market on its toes.

GBP/USD has succeeded to move away from its 14-month lows after this morning’s less dovish BoE comments. The pair has managed to move from £1.5590 to test above £1.5650 as a result (the psychological £1.57 looks to be in danger; nevertheless, there is quite a bit of wood needed to be chopped beforehand).

BoJ Attempts to Save Face

Despite some nervous moments from a few dealers, the BoJ managed to stick to the consensus game plan and maintain its large-scale easing policy (8-1 vote to maintain the ¥80T annual pace) and stick to its upbeat assessment of the Japanese economy despite the dismal growth data already delivered earlier in the week. The data revealed that Japan has again fallen into a technical recession; nevertheless, the BoJ maintains that a “moderate recovery trend has taken hold” despite some weakness on the production side of things. Governor Haruhiko Kuroda and company has also managed to raise their “export” expectations — to date they have been relatively flat.

At his press conference on Wednesday, Kuroda reiterated the view that domestic economy was recovering “moderately,” and that domestic inflation was to hit the +2% target around the financial year-end 2015 on the back of improvement in Japanese employment and wages. Not surprisingly, he reiterated that the BoJ would check risks and make the necessary policy adjustments as policy was “flexible.” He did note that any chance of uncontrollable risk from the now-delayed sales tax to the economy was seen as limited.

Abe Not so Upbeat

The BoJ’s optimistic views are in contrast to Prime Minister Shinzo Abe’s. He has managed to put the second increase in the planned sales tax on hold for 18-months (supported by the -1.6% third-quarter gross domestic product drop courtesy of the April tax increase). He has also indicated and that he would seek a popular mandate for the postponement and Abenomics in a snap election next month.

For the yen bear, the current trend remains the investor’s friend. USD/JPY has managed to print fresh seven-year highs above ¥117.50 during the European session. There is no impetus to change, unless the FOMC minutes stray from the beaten path.

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