Markets to Focus on Fed Minutes for Rate Hike Pace Clues

The Minutes from the FOMC Meeting Will Unveil Policy Maker Insights Behind Historic Decision

The U.S. Federal Reserve ended a seven year stretch of near zero rates with the first benchmark interest rate hike of 25 basis points on December 16, 2015. The market was anxiously awaiting the statement from the American central bank after the confusion caused by the European Central Bank (ECB) a week before. The ECB had failed to deliver on its implied promises and fell short of market expectations sending the EUR higher. The market was later reassured by the actions of the Fed but the USD ended 2015 at 1.0890 when it was trading below 1.06 ahead of the December 3, 2015 ECB rate statement and press conference.

The first week of the year bring two major releases that will dictate the course of the USD. After the influential December FOMC, the notes from that meeting will be released on Wednesday, January 6 at 2:00 pm EST. Ending the week the biggest forex indicator the U.S. non farm payroll (NFP) will be published on Friday, January 8 at 8:30 am EST.

Investors will be going over the minutes to find more information about what does “gradual” mean for the Fed. The American central bank has stepped up use of the word leading up to the rate statement. Chair Yellen only clarified during her press conference that gradual does not mean mechanical, but that only leaves the market back to policy decisions being data dependant. A more hawkish tone to what was a unanimous decision would boost the USD as the currency has started the year strong. If the notes show a divided committee behind the scenes with the interest rate a close call, could deflate the USD and dampen more rate hike expectations in 2016.

The EUR/USD has lost 1.781 percent in the first week of the year. The data out of the U.S. has not been encouraging, but it has sparked more optimism than that out of Europe which hints at the ECB being called into action sooner rather than later. The USD index has touched highs not seen since 2002 as the market awaits the minutes from the December FOMC tomorrow as well as the employment data on Friday.

The pace of the rate hikes is the main speculation surrounding the actions of the central bank. There are few analysts who expect a change in the interest rate in January with the majority forecasting a March and June hikes if the data between then and now backs up the decision. Fed policy members have published their own expectations of four rate hikes, but 2016 being an election year the central bank will play a background role near the final month ahead of the votes for president are cast.

The USD has regained some of the strength that was lost with the ECB failure to communicate. With China still showing signs of a difficult transition from manufacturing to consumer demand led economy and Europe and Japan stuck near deflation the economics validate the rise of the U.S. currency.

USD events to watch this week:

Wednesday, January 6
8:15am USD ADP Non-Farm Employment Change
8:30am CAD Trade Balance
8:30am USD Trade Balance
10:00am USD ISM Non-Manufacturing PMI
2:00pm USD FOMC Meeting Minutes
7:30pm AUD Trade Balance

*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

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 has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. 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