Fed In Full SwingThe release of the December FOMC minutes last night confirmed that the Fed is well and truly back into hawkish territory now. With the Fed announcing a doubling of monthly tapering at the last meeting, along with upgrading its economic forecasts and dot plot forecasts alike, there was little doubt that the minutes would have anything to discourage bulls and this proved to be the case.Inflation Risks Skewed to UpsideBroadly speaking, the minutes showed that the Fed acknowledges the remaining uncertainty and risks within the outlook. However, on balance, the bank’s view was skewed towards optimism with the Fed focused on the ongoing recovery, despite lingering issues. Regarding the omicron outbreak specifically, the minute showed that “several remarked that they did not yet see the new variant as fundamentally altering the path of economic recovery in the United States” and “most agreed that risks to inflation were weighted to the upside”.The tone of the release was decidedly confident with the minutes noting that “Many participants saw the U.S. economy making rapid progress toward the Committee’s maximum-employment goal. Several participants viewed labor market conditions as already largely consistent with maximum employment”.Balance Sheet to Be Unwound Quicker Than ExpectedOne of the more hawkish details was in regard to the discussion around winding down the Fed’s balance sheet. The Fed was shown to be firmly in favour of scaling back assets at a quicker pace than previously decided. On this matter, the minutes noted “Participants judged that the appropriate timing of balance sheet runoff would likely be closer to that of policy rate lift-off than in the Committee’s previous experience. They noted that current conditions included a stronger economic outlook, higher inflation, and a larger balance sheet and thus could warrant a potentially faster pace of policy rate normalization”.Looking ahead, the focus is now on Friday’s jobs report. The final NFP figure of 2021 is expected to come in around double the prior number in the low 400ks. With average hourly earnings expected to tick up and the unemployment rate forecast to fall back, the stage is set for a higher USD if these projections are satisfied. On the flipside, beware short term USD unwinding if these forecasts are underwhelmed, though any downside is likely to prove simply to be an opportunity for longer term players to reload on longs.Technical ViewsDXYFor now, the $ index continues to trade within a tight ranging formation within the broad bullish channel which has framed the rally over H2 2021. For now, the focus is on an eventual break higher, in line with the longer-term trend, targeting a run up to 97.90 next. If we see any downside break, we’re likely to fins support into a test of the channel low/ 94.63 level once stops have been flushed. Below there, would mark a shift in sentiment, turning focus to 93.44.
Source: Tickmill
