Fed Minutes Raise Concerns Over Future Rate Hikes

The key market driver last week were the minutes from the last U.S. Federal Reserve meeting. U.S. equity prices jumped after the release of the minutes. The U.S. Dollar drifted lower, leading to a two-sided trade the rest of the week in the foreign currency and metals markets.

The minutes showed that many members of the Federal Open Market Committee believe a rates hike next month would be appropriate. Traders read the minutes to indicate the Fed is strongly leaning towards a December rate hike, but issues came about whether the Fed knows what the appropriate rate is. Additionally, with the absence of guidance, investors are concerned over future rate hikes which the Fed only said would be “gradual”.

The break in the U.S. Dollar served as proof that the rate hike was fully priced in, but it also indicated that the uncertainty of the future rate hikes could mean the dollar is currently overvalued.

The AUD/USD spiked to a two-week high last week as traders reacted to the FOMC minutes released on November 18. The minutes reiterated the expectation that interest rates would rise at its December meeting, however, U.S. Dollar investors expressed concerns about the timing of future rate hikes. Shorts covered aggressively as investors primarily ignored the steep drop in commodity prices.

The New Zealand Dollar rose after minutes to the last Federal Reserve policy meeting showed an interest rate hike was still likely in December without offering more guidance, prompting some traders to book profits following a recent break. 

Last week, government data showed New Zealand producer prices rose in the September quarter, with output prices increasing at a slower pace than input prices as manufacturers were hit by higher import costs from a weaker currency. 

Lower crude oil prices and the Fed minutes underpinned the USD/CAD. The rally could extend further if oil prices continue to decline this week ahead of the key OPEC meeting on December 4.

The GBP/USD posted a two-sided trade last week before finishing lower. The Forex pair actually reached its low for the week at 1.5154 after the release of the U.K.’s latest consumer inflation report. The U.K.’s inflation rate as measured by the Consumer Prices Index remained at -0.1% in October, according to the Office for National Statistics. The news dampened expectations of a rise in interest rates any time soon.

Earlier in the month, the Bank of England said that rates would not rise until well into next year. In its latest quarterly Inflation Report, released a couple of weeks ago, the BoE said that inflation was unlikely to rise to 1% until the second half of next year, while it would be two years before it reached its 2% target.

The EUR/USD posted a two-sided trade. The less-hawkish Fed minutes helped support the market. However, gains were limited and the market broke after European Central Bank President Draghi put an end to it by reiterating that additional stimulus was coming.

Draghi ended the rally when he said the ECB is ready to act quickly to boost anemic inflation in the Euro Zone. Draghi said, “If we decide (on Dec. 3) that the current trajectory of our policy is not sufficient to achieve our objective, we will do what we must to raise inflation as quickly as possible.”

At its next meeting on December 3, the ECB is expected to unveil a series of steps designed to stimulate the economy. These include changes to the ECB’s asset purchase program and deposit rate.