Dollar in Demand

The US Dollar is trading firmly in the green again today, following the release of the November FOMC meeting minutes, yesterday evening. On the back of the Fed announcing tapering at the meeting, traders were keen to receive the details of the broader discussion which took place, in a bid to gauge how the Fed is likely to proceed going forward. To this end, USD bulls were not disappointed.

FOMC Minutes Highlight Upside Risks

In particular, there was plenty of talk around the upside risks within the Fed’s outlook and the need to respond more reactively, if required. The minutes noted: “Various participants noted that the Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the Committee’s objectives.”

Patient But Reactive

While the minutes highlighted that the Fed would remain “patient” in its tightening approach, as laid out at the meeting, the minutes also noted policymakers agreeing that they wont “hesitate to take appropriate actions to address inflation pressures that posed risks to its longer-run price stability and employment objectives.” The details of the minute are particularly hawkish when you take into consideration that the meeting came ahead of the recent spree of strong data we’ve seen out of the US, notably inflation and retail sales.

In terms of the scale and size of tapering, the minutes noted that while $15 billion per month was agreed upon, “Some participants suggested that reducing the pace of net asset purchases by more than $15 billion each month could be warranted so that the Committee would be in a better position to make adjustments to the target range for the federal funds rate, particularly in light of inflation pressures.”

Incoming Data to Take Centre Stage

The takeaway from these minutes then, is that there are clear upside risks in the USD outlook going forward. If data continues to accelerate, this will be met with a firm upward repricing in Fed tightening expectations. Once we move into next year particularly, the focus will very quickly shift to how soon the Fed is likely to raise rates.

Technical Views

DXY

The rally in the Dollar index has seen price breaking above several key levels, with today’s move taking the market above the bull channel top. With both MACD and RSI firmly bullish, the focus is on continued upside in the near term with 97.18 the next level to watch. To the downside, key support is at the 95.61 level.