Minutes from last month's Federal Open Market Committee (FOMC) meeting, have seen a knee-jerk reaction in the dollar which initially fell sharply before clawing back its losses. US equity benchmarks, however, retraced from intraday highs and were unable to recant the decline following the ambiguous nature of the Federal Reserve (Fed) minutes.

FOMC minutes show divided views on ‘tapering’ timeline

Minutes from July’s FOMC meeting have shown a divide amongst policy makers in lieu of scaling back (tapering) stimulus measures currently underway.

While some Fed members suggested that the initiation of tapering should happen ‘relatively soon’, others have suggested that there should be no tapering in the near future. It was reiterated that the timeline towards tapering was independent of the timeline to hiking interest rates.

Monetary policy remains appropriate

Policymakers currently believe that levels of monetary accommodation currently in in pace were sufficient to help achieve the Fed's mandated goals of sustained inflation around 2% and ‘maximum employment’.

Labour conditions still require ‘substantial progress’

While labour conditions have been improving, the Fed’s mandate and goal towards maximum employment had not been met, and has reiterated that further ‘substantial progress’ was still needed. Employment levels were highlighted as remaining below pre-Covid-19 pandemic levels.

At the time of the July FOMC meeting, the unemployment rate for June had been recorded at 5.9%. Since the last FOMC meeting that rate has in fact improved to 5.4% in July. The Fed’s target for ‘maximum employment’ remains an unemployment rate of 4.5%.

Inflation still considered ‘transitory’

The central bank still considers the current sharp rise in inflation to be transitory, although the threat of Delta variant induced supply chain disruptions and increased input costs could keep prices elevated into 2022. In lieu higher inflation figure while still considered transitory could prove to be more persistent than originally expected.

Economic growth expected to remain firm

The Fed expects economic growth into the remainder of the year to remain robust as the vaccine rollout supports a further reopening of the US economy, amidst what is considered very accommodative conditions.

Jackson Hole Symposium to provide updated insight

While the minutes from the last Fed meeting will have provided some insights into the thoughts of policymakers, the Jackson Hole Symposium scheduled for 26 to 28 August should provide markets with updated views from key decision makers, placing increased relevance for markets pertaining to the event. Current expectations are that the Fed could look to commence with tapering initiatives as early as December this year, while some policymakers are pushing for asset purchasing programs to end by mid-2022.

US Dollar Basket/Index – technical analysis

The US Dollar Index (DXY) has renewed gains following the FOMC meeting minutes. The uptrend resumption now sees $93.45 as the initial upside target from the move, a break of which (confirmed with a close) would consider $93.90 a further upside resistance target.

Traders who are long might consider using a close below the $92.50 level of support as a stop loss indication for the trade.

Summary

• FOMC minutes show that policy makers are divided on the pace of monetary tightening
• Economic growth is expected to remain strong in 2021
• The rise in inflation is expected to be transitory, although elevated levels could persist for longer than originally anticipated
• Employment remains below pre-Covid-19 pandemic levels and requires ‘substantial progress’ to reach ‘maximum employment’ (4.5%)
• The Jackson Hole Symposium commencing on 26 August is expected to reveal updated insights from Fed members
• The dollar has renewed its strengthening trend post the FOMC minuet release