Market participants did not expect to see anything new in the Fed minutes released yesterday. The US dollar gained bullish momentum, undermining demand for risky assets. As a result, the euro failed to consolidate above the 14 level.
Fed meeting minutes
In January, Fed policymakers voiced the readiness to hike the interest rate due to rising inflation. Even though they supposed that inflation could rise higher, the actual figure exceeded their expectations. According to the minutes, if inflation does not lower, the regulator will have to resort to an aggressive stance, tightening monetary policy earlier than planned. Therefore, the central bank is ready to make more changes to the parameters of monetary if necessary. For this reason, the regulator held a closed meeting on February 14. Despite the fact the Fed did not make any decisions, it increased expectations of rate hikes.
Notably, the meeting took place before the release of important economic reports that showed a robust recovery of the labor market and a further jump in inflation. Investors expect the Fed to hike the key rate by at least 150 basis points in 2022, up from 75 basis points just a few weeks ago.
Speculators have been anticipating rate hikes for a long time. It may happen in March. The Fed is projected to raise the interest rate by 50 basis points. According to the US Department of Labor, the labor market reached full employment. This is why the Fed will make a decision on the key rate at the March meeting taking into account inflation data. Some market participants believe that the consumer price index in January is likely to rise sharply. So, the Fed will have to raise the key rate by 50 basis points in March. If in February, consumer prices remain high, the central bank is highly likely to tighten monetary policy.
US inflation hit 7.5%, the highest level in four decades. The economy added almost 500,000 new jobs last month despite a spike in Omicron cases. Average hourly wages also increased. These factors are sure to boost inflation higher.
In the minutes, policymakers also highlighted the importance of asset purchases taper. The has not announced so far the exact date when it is going to start reducing the balance sheet. Analysts reckon it may begin at the end of this year after rate hikes. The Fed may taper the QE program shortly after it hikes the key rate. The regulator confirmed once again its intention to significantly reduce the balance sheet in the future. In the long term, treasuries mortgage-backed securities will remain mainly on the Fed's balance sheet. So, it may get rid of the mortgage-backed securities worth $ 2.7 trillion.
Macroeconomic calendar
Yesterday, the US revealed retail sales data, which once again confirmed the risk of a rise in inflation at the beginning of this year. Retail spending climbed at the start of the year, surging by the most in 10 months and highlighting a steady appetite for cars and furniture. The Ministry of Commerce noted that retail sales jumped by 3.8% in January after falling by 2.5% in December last year. The actual reading exceeded the forecast figure of 2%. Retail sales data is not adjusted for inflation, which makes the reading higher. The report also showed that consumer spending in the first quarter was much better than expected, even taking into account higher inflation. The overall growth indicated an improvement in the labor market. Hence, households continue spending money despite high inflation and a drop in consumer confidence.
Excluding cars, retail sales increased by 3.3%, topping all expectations. So-called control group sales, which are used to calculate GDP and exclude food services, auto dealers, building materials stores, and gasoline stations, climbed by 4.8%, also the strongest since March.
Industrial production data also turned out to be positive. Manufacturers are gradually resolving the problems with the shortage of materials and labor that occurred due to the pandemic. Manufacturing output gained 0.2% last month after declining by 0.1% in December, the Federal Reserve said. Total industrial production, which also includes mining and utility output, rose by 1.4% in January, notching the highest level in three months. Economists had expected the figure to total 0.2%. The figures underscored high demand for goods was key to the revival in the country's industry.
Capacity utilization at factories came in at 77.3% in January. Total industrial capacity grew to 77.6%, the highest since 2019.
Outlook for EUR/USD
In the morning, the euro declined. However, bulls managed to defend the support level of 1.1325, which fueled risk appetite. demand for the euro is likely to remain high amid the de-escalation of conflict between Russia and Ukraine. The price needs to consolidate above 1.1380. If so, it may approach the highs of 1.1420 and 1.1460. If the euro drops, traders are likely to open long positions at 1.1325. However, the key support level is located at 1.1280. Bulls and bears may fight for this level if the pair returns to this range
Outlook for GBPUSD
Bulls are trying to push the pair to weekly highs. However, the price needs to break through the resistance level of 1.3600. If the attempt is successful, it may reach the highs of 1.3640 and 1.3690. If it drops below 1.3555, the pressure on the pair will increase. In this case, a correction to the weekly lows of 1.3520 and 1.3490 is likely to occur.