The FOMC Meeting Minutes for the January 2013 meeting revealed what was basically already known: there are a few hawks in the top of the US central bank.
Yet again, some members supported withdrawing or tapering QE sooner than later. The market’s reaction was a surge of the US dollar across the board, with EUR/USD losing its balance and GBP/USD extending its losses to a multi-year low. Looking at the bigger picture, there was nothing new, and the doves remain in control. The see-saw between the FOMC statements (dollar negative) and the minutes (dollar positive) will likely continue.
So, what caused the dollar’s surge? This is an example from the minutes:
Several participants emphasized that the Committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved. For example, one participant argued that purchases should vary incrementally from meeting to meeting in response to incoming information about the economy. A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred.
Wild Market Reaction
This “discovery” sent EUR/USD finally below 1.33 to 1.3270, not too far from the 1.3250 line. 1.3290 turns into weak resistance. Further support is at 1.3170. For more, see the EUR/USD forecast.
GBP/USD, which was already hit by the UK meeting minutes, extended its losses and fell to a 2.5 year low, reaching the low 1.52s. It traded at 1.54 earlier in the day, and was already vulnerable before the FOMC minutes. GBP/USD Continues Bearish Trend Towards 1.5000
Also the Canadian dollar, Australian dollar and New Zealand dollar retreated, and USD/JPY also rose within its 92-96 range. Also gold plunged as it supposedly has less QE fuel. The reaction was quite overwhelming.
Bigger picture: see-saw between statement and minutes
Here at Forex Crunch, we like volatility, but the reaction seems a bit exaggerated: we’ve already seen this before: the minutes of the decision to launch QE4 and present qualitative guidelines, a very dovish, dollar negative decision, showed that a few members saw QE winding down from the end of 2013. The revelation of the minutes sent the dollar higher.
And what happened in the next decision? No change in policy and no hint whatsoever. The statement even noted that the economy paused.
Statement = dollar negative, minutes = dollar positive? So, until we hear dovish speeches from Bernanke and Yellen, the dollar will get some back wind from the minutes. But until the next statement in mid-March, things will probably change.
Further reading: US: Slow improvement and far less political uncertaintyGet the 5 most predictable currency pairs