Market sentiment remained moderately unchanged yesterday after the release of the minutes from the Federal Reserve’s (Fed) latest meeting. As expected, the minutes showed that the bank’s next decision concerning interest rates will probably result in a hike.
Fed minutes show probably rate hike at next meeting
Yesterday's most significant market event was the release of the minutes from the most recent Fed meeting. It didn’t seem to come as a shock that the majority of Fed officials agreed that there is still a possibility of inflation.
Even so, the majority decided to stop hiking rates, but a few favored keeping the 25 bp increase in place.
According to Fed minutes, the inflation targets would not be met until 2025, and several Fed officials were concerned that this year would end in a mild recession.
Therefore, there is a very high likelihood that they will resume 25 bps rate hikes at the next meeting given the robust labor market, the ongoing strength of the economy, and the fact that inflation is still well below target.
Nothing that the market hasn't already discounted, and the interest rate curve reflects this.
Could sentiments change with the upcoming NFP?
The market's impression of the direction of interest rates may vary depending on the economic data that will come out, including tomorrow's Non-farm payrolls. For now, yesterday's Fed minutes had no effect because it didn't alter the market's perception in any way.
Dollar strengthened on release of Fed minutes
Perhaps all it accomplished was to reaffirm the ongoing rise in interest rates, which had a small impact on the value of the Dollar, which rose somewhat after the minutes' contents became public.
Due to the strengthening of the Dollar, the EUR/USD pair dropped by about 30 pips and the 2-year bond's yield climbed to roughly 2.95%.
The Wall Street indices, which were in positive territory just prior to the release of the Fed minutes, reversed course and briefly fell.
Bearish corrections could be coming up
The effects of a monetary policy that is anticipated to be more aggressive, as well as predictions of a slowing economy, are the factors that drive the market risk sentiment to be slightly more negative.
All of this increases the likelihood of negative corrections, along with the fact that the indices are technically overbought following an extended uptrend.
However, it will be the outcomes of the earnings season, which starts next week and on which we shall report, that will actually determine the tone for the foreseeable future.
EUR/USD daily chart. Sources: Bloomberg, Reuters
- Fed minutes showed possible rate hike in the next meeting
- Inflation targets could be reached in 2025, according to Fed minutes
- The release of NFP could change market perception of future hikes
- Dollar strengthened after publication of Fed minutes
- EUR/USD fell around 30 pips
- Bond yields rose slightly
- Wall Street indices experienced slight losses
- Indices could be prone to bearish corrections
- Earnings season will begin next week