The April Minutes of the Fed meeting became the highlight of economic calendar on Wednesday. There was some subtle shift in rhetoric towards early policy tightening that surprisingly had marginal impact on FX and US debt. “A number” of the Fed policymakers expressed will to start discussing QE at upcoming meetings. QE is one of the pillars of soft credit policy and any wind blowing towards tapering of the asset purchase program were expected to put investors on alert. However, this did not happen. The reason for this is probably the fact that the Fed meeting took place before the release of anemic labor market data for April. Recall that the growth of jobs in the US was more than three times lower than the forecast which forced markets to back out of the expectations of early curtailment of stimulus measures.

Post-pandemic Fed policy has focused on job recovery and, to a lesser extent, inflation. For the Fed to start raising rates, economic data should either indicate sustainably high inflation rates (2.8% for Core PCE for three months or more) or significant progress towards employment goal. The latest data shows that there is some controversy about realization of the first risk in the near-term future and negligible risk of happening of the second event, so on balance the Fed is expected to continue to keep short-term interest rates near zero until 2023. However, if investors expect ever higher inflation, the Fed’s containment of short-term nominal rates implies that short-term government bonds will become less and less attractive to invest. This, by the way, is one the key factors that determines USD downtrend in the medium-term, as in other economies the mix of inflation expectations and tighter Central Bank policy is more bond-friendly, which could lure investors away from US bonds.

Foreign exchange markets ignored yesterday a 30% crash of the cryptocurrency market, which erased about $1 trillion from the wealth of investors. Fed spokesman Bostic said the cryptocurrency crash was not a systemic risk, which further calmed the markets.

Today the data is due on unemployment claims in the United States. Market impact of the report increased after the April NFP, because, firstly, it became clear that not everything is so unambiguous with the dynamics of employment in the US, and secondly, the Fed said that there is a lot of noise in the data and they want to see a trend. Claims for unemployment benefits are a key interim statistic that forms expectations ahead of NFP. The dollar is likely to drop on a weak report and vice versa. However, US equities are likely to react downwards to the weak report given fragility after retesting the <4100 area in SPX futures on Thursday, which increases the risk of a correction towards 4000. The risk of a short-term correction in EURUSD towards 1.21300 area is also increasing:

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