Later today, the FOMC Minutes will reveal what the Fed members discussed three weeks ago during the previous FOMC Meeting. All traders remember that both the statement three weeks ago, as well as the press conference that followed, were pretty lull.
Since the meeting was right after the U.S. election day and the outcome was not clear, the Fed did not want to take any chances and left the monetary policy unchanged. Therefore, today’s minutes may not reveal anything spectacular.
However, in the meantime, plenty of things changed in the market. For one, the USD is trashed day after day, and there is no end in sight for its weakness. Also, the new administration at the White House already started picking up members of its team. One of them is Janet Yellen, the former Fed Chair, that just accepted a new role as Treasury Secretary.
USD Ahead of the FOMC Minutes
The chart above showed the source of the USD weakness during the months following March 2020. As the Fed opened the USD swap lines with other central banks around the world, the need for the world’s reserve currency diminished significantly.
The fact that the grey area on the chart above decreased does not mean that there is a USD shrinking liquidity – just the opposite. The Fed flooded the financial system with dollars, and now the other central banks with access to the swap lines simply do not need them anymore. It suggests that there is plenty of USD liquidity available, and so the USD bearish trend seen all this time makes sense.
The GBPUSD traded today above 1.33, the EURUSD rose as much as 1.1927, and the AUDUSD almost reached 0.74. At the same time, the stock market in the United States makes new all-time highs.
However, caution is needed as we get closer to the end of the trading year. JP Morgan warns that there is about $300 billion selling interest on the stock market toward the end of the year due to rebalancing. Also, gold fails to bounce, suggesting the USD buyers are still there. Finally, the ECB is due in two weeks from now and the Fed in three weeks.
As the EURUSD is so close to 1.20 and the ECB expressed its concern about the exchange rate, the pressure on the EURUSD builds while close to the level. If the stock market reverses even a bit and the USD starts gaining traction, the EURUSD should be the most vulnerable one to a correction.
Will that correction be triggered by today’s FOMC Minutes?