Dollar Lower Following FOMC Minutes

The US Dollar remains under selling pressure this week as the minutes from the latest FOMC meeting in March saw tightening expectations dialled back further. The Fed has been adamant recently in its view that any spike in inflation from the re-opening of the US economy is likely to be temporary and has also addressed the issue of rising yields, again saying it is not concerned.

Asset Purchases To Remain For Some Time

The March meeting minutes saw the Fed doubling down on this view noting that: “Participants noted that it would likely be some time until substantial further progress toward the Committee’s maximum-employment and price-stability goals would be realized.” The minutes went on to say that: “consistent with the Committee’s outcome-based guidance, asset purchases would continue at least at the current pace until then.”

Outcome-Based Guidance

Notably, the minutes also elaborated on the Fed’s recent shift in policy strategy away from hiking rates in anticipation of inflation hitting target. The minutes outlined the bank’s aim of using “outcome-based guidance” meaning that the Fed will hold off from hiking rates until “substantial progress” is made in achieving its dual mandate of maximum employment and inflation at or above 2%.

Inflation to Run Hot If Necessary

The Fed’s shift away from a hard inflation target of 2% has been a key source of focus over recent months given the rise in inflation expectations and yields. Typically, as inflation expectations lifted, the Fed would tighten accordingly. However, given the depth of unemployment caused by the crisis, the Fed has reaffirmed its message that it will allow inflation to run a little hot if necessary, in order to achieve maximum inflation. To a large extent, this has taken a lot of steam out of the bullish USD view.

Fed Downplaying Inflation Risks

While the Fed has upgraded its economic forecasts for the year ahead and noted some risks in the outlook with regard to the impact of stimulus and the re-opening of the economy on US inflation, for now at least, members have been fairly uniform in their comments on the likelihood of tightening this year. On the back of last week’s negative wage growth number for March, it suggests that the next quarter and beyond will have to show some serious upside surprises for the Fed to shift its view.

Technical View

US10Y

The rally in US 10-year yields has lost some momentum recently. The move into 1.77 has been met with firm selling interest, taking price back down below the 1.685 level. With strong bearish divergence into the last high, while price holds below 1.685 there are risks of a deeper correction. However, given the velocity of the rally so far, the near-term view remains bullish and it would take a break back below the 1.424-1.328 region to affect a shift

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