FOMC Minutes: “More Restrictive Stance” to Come?

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The FOMC Minutes of the June 14-15,2022 meeting told a story of a frightened Fed that will do anything to prevent inflation from rising, even if it means slowing growth.

The FOMC protocol of June 14-15 released today told us what the markets already knew at the meeting: that the inflation outlook has deteriorated and that a 75bps increase is needed. However, the Committee also noted that policy may be even more restrictive in time, and that many see a significant risk of entrenched inflation. As a result, the Committee raised its inflation forecasts and lowered growth forecasts. In addition, Fed officials saw a 50bps or 75bps rise at the July meeting as likely. This is the Fed, which fears inflation is spiraling out of control. And indeed, Fed Chairman Powell has been whistling the same tune since the FOMC meeting: lowering inflation will be painful and could even shatter growth. However, it must be done quickly to prevent a rapid rise in prices to take root.

The U.S. Dollar Index has moved higher since May 2021. The DXY moved in an orderly channel from 89.53 to 99.94, before breaking above the channel in mid-April 2022. As it became more evident that inflation continued to rise and the Fed should raise rates, the DXY continued to rise above the channel’s upward trend. On May 13, the U.S. Dollar Index reached a high of 105.00, before retreating to test the channel’s upward trend. The support level held, and it went to the races again, with prices moving higher in rising wedge formation. The expectation is that price will move lower from an upward wedge, however yesterday, price broke above the upward trend of the formation and continued higher. Today, the DXY traded to the 161.8% Fibonacci extension from the May 13 highs to the May 30 lows, near 107.30. Horizontal resistance also crosses at the same level, dating to December 2002. The next resistance level is the September 2002 highs at 109.77. However, if the price action of the DXY proves to be a false break, the US Dollar Index should retreat into the wedge and test the other side near 104.60. Down there, price may retreat to the June 15 lows at 103.41, then horizontal support at 102.78.

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Source: Tradingview, Stone X

As the Euro makes up 57% of the US Dollar Index, EUR / USD and DXY are moving in opposite directions. Therefore, it would make sense that as the DXY makes 20-year highs, EUR / USD makes 20-year lows, trading at its lowest levels since December 2002. Today the pair has reached a low of 1.0161, breaking through the 127.2%. Fibonacci extension from the lows of May 12 to the highs of May 30. Below is further support at 161.8% Fibonacci extension of the same time frame at 1.0084, then the downtrend of the long-term channel and psychological support at 1.0000. First resistance in the daily time frame is not up to the previous lows at 1.0340. Up there, the pair may trade to the top of the downward sloping channel near 1.0575, then the highs form on June 27 at 1.0615.

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Source: Tradingview, Stone X

The FOMC Minutes of the June 14-15,2022 meeting told a story of a frightened Fed that will do anything to prevent inflation from rising, even if it means slowing growth. The DXY has reflected this by trading at its highest level in 20 years. As EUR / USD trades against the DXY, EUR / USD is at its lowest levels in 20 years. Watch NFP on Friday to see if the jobs paint a picture of an economy that can deal with higher rates without losing too many jobs!

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