Amid a quiet calendar on the second full trading day of the year, the December 2016 FOMC meeting minutes stand out as the significant catalyst for the US Dollar today. The minutes, reflecting the conversation had amid the Fed’s 25-bps rate hike, will surely drive volatility on what has been a lackluster day for the greenback thus far.
The December 2016 FOMC minutes should reveal a cautiously hawkish tone among policymakers, although perhaps not to the degree to which rates markets have aggressively priced-in action over the next year. While financial markets have been quick to send inflation expectations higher after the Trump election win, only a “few” FOMC officials, per Fed Chair Janet Yellen, have incorporated the potential impact of fiscal stimulus into their rate projections (affectionately known as the ‘dot plot’).
If this is the case, then, there may not be the hawkish hue to the FOMC minutes today that appeared superficially last month. We’re going to want to pay particular attention to see to what degree FOMC officials have incorporated changes in fiscal policy into their forecast, and what plans they may have to react to said changes. In sum, while markets have been reading in between the lines to find evidence of three rate hikes in 2017, it is possible that the December 2016 FOMC minutes reveal a more cautious tone than is currently being priced by markets.
Any reaction from the FOMC minutes should be looked at exclusively through the lens of interest rate differentials: if Treasury yields increase post-minutes, the US Dollar should do well via USD/JPY; if Treasury yields decrease, the US Dollar should do poorly via EUR/USD.
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