Forex today: turn-around FOMC minutes, bargain hunters buy back the dollar

Forex today was all about the FOMC minutes and a frantic aftermath with plenty for everyone considering there was a big turn around in sentiment from the initial moves in the markets. 

Prior to the FOMC minutes, the USD retained its firmer tone despite the relatively benign comments from various Fed officials. The DXY had been on track for the 90 handle at the start of the US session but the bulls were facing headwinds there and the dollar was sent back to oscillate below 89.80.

Prior to the minutes, the equity market took solace from Fed comments and upward momentum in the February US Markit PMI with a supportive earnings backdrop. Stocks then cheered the minutes with a spike and broke the correlation to the yen that also rallied on a weaker greenback. US yields were also higher at the start of the session, but these too dropped back from 2.89% to 2.87% in the 10-yrs before rallying right up to 2.9060%, just shy of the YTD high of 2.9095%. 

The FOMC minutes arrived and while all officials agreed that the inflation target should be met in 2018, some officials, however, also saw an "appreciable risk of an inflation lag" to the 2% target. This was enough to send yields lower and the DXY back to 89.60. The 10-yr yields below 2.90% on the knee-jerk. 

Then, the turn around came: 

The dollar rallied hard onto the 90 handle from down at 89.60 and the 10yr yields reached 2.9537. Given that the Jan meeting and minutes came before a series of additional inflationary and bullish economic data, such as the strong figures on average hourly earnings (+2.9%) and the stronger-than-expected readings in the CPIs, coupled with what the FOMC regard as above-trend growth and the falling unemployment rate, markets decided to get long of  the dollar again. Gold and stocks subsequently dropped on the outlook for the possibility of four rate hikes in 2018 - (Fed fund futures yields are pricing in the prospects of the first of four rates hikes to come as soon as March with a total of four hikes priced by end-2019).

As for the other currencies, EUR/USD opened near 1.2340 while markets were awaiting the FOMC minutes. EUR/USD was around 1.2360 before dropping back to below the 1.23 handle and meeting 1.2273 the low.

GBP/USD was already struggling and licking its wounds after meeting a 1-week low down at 1.3927 on the back of a mixed labour market report with arise in the UK ILO jobless rate. There had also been talk of a hard Brexit faction in PM May's party who are demanding a clean break from the EU.  Carney & Co. were also testifying with an upbeat assessment of the economy going forward underpinning the pounds robustness for the early part of the session. The best part of the range was between 1.3910-1.3990 better bid post the FOMC minutes until the turn around that sent cable back to 1.3912 before the Asian handover. 

EUR/GBP has been in a sideways drift since the shenanigans of the dollar over the FOMC minutes but it was sent lower from the 100-hourly SMA at 0.8846 in the London handover as cable picked up a bid. The cross ended the NY session at 0.8822 +0.1%, from within a range of 0.8813-0.8851. 

USD/JPY is still constructive on the upside as fears over a stock market rout and deficit risks subside with traders buying the dip. Also, the Markit Mfg PMI as being the highest since Oct 2014 supported the case for the pair above 200-hr MA. Initially, though, USD/JPY fell on the back of the FOMC minutes until the DXY and yields flipped. The yen was offered even as stocks changed course while investors concentrated on a faster pace of rate hikes form the Fed this and next year. USD/JPY ended NY at 107.77 from within a range of 107.28 and 107.90.

As for the antipodeans, the Kiwi was taken as high as 0.7385 before losing flight and dumping to 0.7316 for the close. AUD/USD turned around and was threatening the bull's commitments at 0.7800 once again with a look in towards the 200/100-D SMA convergence down in the 0.7770's.

Key events ahead:

Analysts at Westpac noted the key events as follows:

• "Euro Area: ECB Minutes for the Jan 24-25 meeting are released. Interest will be on a discussion around upside risks relating to cyclical momentum, and downside risks relating to global factors including FX developments.
• UK: Q4 GDP 2^nd estimate is released for the UK after the first estimate came in at 0.5% with firmness in the services sector.
• US: Fed speak includes Bostic at the 2018 Banking Outlook Conference and Dudley at a NY Fed briefing on Puerto Rico and the US Virgin Islands."

Key notes from the US session

• FOMC Minutes: officials saw an appreciable risk of inflation lag to target
• UK employment data made for mixed reading; BoE implications? - Scotiabank
• Carney & Co. TSC testimony proceeds again after suspension
• UK PM May: still wants Brexit transition period of around 2-years – RTRS