FOMC Minutes sends USDJPY to 118

The Dollar/Yen recorded a new seven-year high of 118.058 following the release of the FOMC Minutes which suggested the Federal Reserve will look to begin raising interest rates from the middle of 2015 onwards. The Minutes also indicated FOMC members are discussing whether to remove the “considerable time” phrase from future releases. While it would not be completely unexpected for the Fed to begin raising rates from the middle of next year, there has been speculation that fears over the global economic recovery could possibly push back the first rate rise until after 2015. The FOMC Minutes suggested that would not be the case, and this reassurance subsequently pressured metals on Wednesday evening. Gold dropped around $30 and fell as low as $1174 before finding support at $1180 once again, with Silver dropping below $16 to $15.87 for the first time this week.

There was not noticeable increased demand for the Dollar following the Minutes release because, although the main messages shared by the policy makers were relatively hawkish, there were other comments in the release that were also slightly dovish. For example, FOMC members once again showed concern over a possible decline in future inflation readings, alongside indicating downside risks have increased in China, Japan and Europe. Policy members noted if foreign economic developments deteriorated further in the upcoming months, US economic growth might be slower than currently expected. This can also be seen as a possible reason for the Fed to delay raising interest rates, and that’s largely why there was a slightly subdued reaction to the FOMC release.

Prior to the FOMC Minutes being released, there were some signs of USD weakness in the currency markets and this resulted in both the Eurodollar and Cable appreciating from some risk appetite. During European trading, the Eurodollar mainly consolidated between 1.2512 and 1.2540 before some anxiety among investors prior to the FOMC release finally pushed the pair above the recently seen 1.2570 resistance level, with the pair climbing to 1.2598. The pair concluded trading at 1.2533; where the pair trades during Thursday’s European session will largely be dependent on the market reaction to the EU PMI data for November.

Optimists will be hoping for some evidence of the weaker Euro exchange rate improving economic data, however any further signs of the EU economy stagnating will lead to suspicions the ECB will need to add further stimulus and likely send the EURUSD lower as a result. US inflation for October is announced today and the markets will be looking for any clues the recent concern shown among the Fed regarding a possible inflation decline might be valid. If US inflation does unexpectedly decline, it would likely delay expectations for the Federal Reserve to begin raising interest rates, and present an upside opportunity for the Eurodollar. In the event the EURUSD does attempt to rally on Thursday, possible resistance can be found located at 1.2550, 1.2570 and 1.2598.

Elsewhere, the Cable fell to another yearly low on Wednesday morning at 1.5589 with investors pricing in a dovish Bank of England (BoE) minutes release, before the pair bounced back to conclude trading at 1.5680. Following the disappointing Inflation Report last week, there was a consensus the minutes would again reiterate weak price pressures and signs of slowing economic momentum as reasons to keep rates unchanged at a record-low 0.5%. Some were also anticipating one of the Monetary Policy Committee (MPC) dissenters could even switch position and vote against raising interest rates. The latter didn’t prove to be the case and in truth, it was optimistic thinking. Both of the previous MPC dissenters - Ian McCafferty and Martin Weale - have each spoken recently and indicated the need for the BoE to begin raising interest rates and it is not expected either will change their votes.

Nonetheless, although two members of the MPC are clearly in favour of the BoE raising rates, the GBPUSD is not expected to rally substantially to the upside until a third member of the MPC joins the dissenters and if last week’s Inflation Report is anything to go by, this will not happen anytime soon. Until then, any substantial upside moves in the Cable will most likely be correlated to investors closing positions on the USD. Later on Thursday, Retail Sales for October are expected to be announced at an annualised 4.2% which should present an opportunity for the Cable to attempt entry to 1.57. If the Retail Sales miss expectations, it would be a further indication that UK economic momentum is slowing and thus is likely to lead to the GBPUSD moving lower.