EUR/USD catches a bid after “less hawkish” FOMC minutes

• EUR on the front foot after FOMC minutes look “less hawkish”.
• EUR was under pressure earlier on subdued EZ PMI data.

EUR/USD is now trading around 1.2347, in the New York session, edging up by 0.07% and well off the earlier day low of 1.2299 after FOMC minutes look “less hawkish” than expected by the market. Most of the FOMC members agreed that recent strengthening of the economy increased  the “likelihood of further gradual rate increases”.

The market may be expecting only “further gradual rate increases” instead of “likelihood of further gradual rate increases”.

FOMC minutes highlights:

“Majority of Fed members say stronger growth increases the likelihood of more hikes. Some officials saw an appreciable risk of inflation lag to target. Voters agreed that recent strengthening of the economy increased the likelihood of further gradual rate increases. Most voters said recent data suggested modestly strong near-term economic outlook that was seen in December. Generally judged risks as roughly balanced but several saws increased upside risks in near term. A number of policymakers raised near-term economic growth forecasts because of stronger data and info suggesting a larger impact on a tax overhaul. A few said important to monitor slope of the yield curve. Warned imbalances in financial markets may emerge as the economy operates above potential”.

In brief, FOMC was quite optimistic about US economic growth, but somehow concerned over US inflation trajectory and thus less committal about its earlier projections of 3 rate hikes in 2018.

USD bulls were expecting “further gradual adjustments” in interest rates as opposed to simply “gradual adjustments” at January’s meeting, the last under former Fed Chair Janet Yellen.

Thus the FOMC minutes for January may be termed as less hawkish than expected by the market and subsequently, the USD is doomed across the board, the  EUR is a beneficiary of that dollar slump right now and EURUSD catches a bid.

On the other side, EUR came into pressure on early Wednesday, after a flurry of subdued PMI data across the Eurozone (EZ) including Germany, which casts a shadow on the narrative of reflation.

EUR came into further pressure after ECB’s Vitas commented that QE should be tapered, not ended abruptly. At the same time, he also emphasized that ECB has not seen any unwarranted tightening in conditions and it’s appropriate to rephrase guidance to focus on all instruments, not just QE.

The comments by Vitas are not new and the market is quite confident that the ECB will close the QE completely by Dec’18 after a short taper from Oct’18 and thereafter may begin to gradually normalize (hike) its policy rate from H1-2019 onwards.