Fed meeting minutes enter investors’ radar

Will the Fed minutes confirm optimism about the labor market?

The US dollar traded slightly lower against most of its major counterparts on Tuesday, gaining some ground only against the British pound, the Swiss franc, and the Canadian dollar. Today, it is rebounding again, outperforming the New Zealand dollar the most.

Although traders are keeping an eye on Geneva, where nuclear talks between the US and Iran are taking place, as well as peace talks between Ukraine and Russia, today they are likely to focus on the minutes of the latest FOMC decision.

At that meeting, officials decided to hold interest rates untouched. Fed Chair Powell noted that downside risks to the labor market are diminishing, a view corroborated by last week’s blockbuster NFP report for January and the acceleration in the weekly ADP employment report for last week.

That said, following the slowdown in CPI inflation investors are penciling in more than two quarter-point reductions by the end of the year. Maybe traders want to dig into the minutes to see whether more officials agree with Powell’s view before they scale back their rate cut bets.

Still, the minutes are unlikely to make a huge difference, as the Committee’s dynamic could very well change when Kevin Warsh takes the helm. So, even if traders reduce their rate cut bets, around two quarter-point reductions could stay factored in for this year, unless Friday’s Q4 GDP strongly surprises to the upside.

Yen slides as US announces projects to be financed by Japan

The Japanese yen is under pressure again today, even after the International Monetary Fund (IMF) urged the Bank of Japan to continue raising interest rates and Takaichi’s government not to further loosen fiscal policy. Perhaps it was driven lower by the gains on the Nikkei after the US government announced that Japan will finance three projects valued at $36 billion. This is the first of around $550bn worth of projects Tokyo agreed to so that tariffs on Japanese goods are lowered.

Having said that though, yen traders are unlikely to engage in bold short positions as steeper declines may ring the intervention alarm bells again.

BoE set to cut rates in March, RBNZ policy needs to stay accommodative

The pound traded indecisively after the UK CPI data for January. The headline rate slipped to 3.0% y/y from 3.4% as expected, but the core rate slid by less than forecast. Combined with Tuesday’s weaker-than-expected employment report, slowing inflation raised the probability of a BoE rate hike at the upcoming gathering up to 87%.

The kiwi is the main loser today, coming under strong pressure after the RBNZ kept interest rates unchanged and policymakers said that policy needs to stay accommodative to support the economic recovery. Following the decision, a 25bps rate hike is now fully priced in for December.

Stocks rebound on dovish Fed talk, progress in US-Iran talks

On Wall Street, all three of its main indices finished the Tuesday session in the green, with tech shares rebounding from their lows. Perhaps remarks by Chicago Fed President Goolsbee that the Fed should proceed with “several more” rate cuts were a key driver as expectations of more rate cuts mean higher present values for high-growth firms.

On top of that, San Fransisco President Daly noted that the Fed must proceed with analysis to determine whether AI could bolster economic growth without fueling inflation, allowing for looser monetary policy down the road.

Risk appetite may have also been supported by the progress made in nuclear talks between the US and Iran in Geneva. What’s more, Ukraine and Russia concluded the first of two days of peace talks, suggesting willingness from both sides to end the conflict that started in 2022.