Fed minutes point to inflation concerns, yen rallies

Fed officials favor wait-and-see stance

The US dollar extended its recovery against most of its peers yesterday, losing ground only against the Japanese yen. Today, the greenback is pulling back, with the yen accelerating its advance.

The minutes of the latest FOMC decision revealed that policymakers were in favor of taking the sidelines due to the need for further evidence that inflation is headed towards their objective, citing the persistent strength of the US economy and fears that tariffs may threaten to undo the central bank’s progress towards the 2% inflation target.

However, officials also expressed concerns about how Trump’s policies could impact economic growth, which may be why investors are keeping rate cuts on the table for this year. According to Fed fund futures, they are currently penciling in 39bps worth of reductions by December. That’s also why the dollar is not extending its gains today.

Having said that though, the strong jobs report and the hotter-than-expected inflation prints for January, combined with hawkish remarks by Fed officials, are keeping the door open for an upside revision to the March dot plot, perhaps to signal only one quarter-point reduction.

Yesterday, Fed Vice Chair Jefferson and Atlanta Fed President Bostic entered the list of officials favoring a wait-and-see approach, leaving Governor Waller alone in the slightly more dovish camp. Today, it will be the turn of Governor Adriana Kugler to speak, and should she also sound cautious about further rate cuts, the dollar could recover, especially if, earlier in the day, the initial jobless claims for last week corroborate the notion that the labor market remains robust.

Will the BoJ hike in July?

The yen is the biggest gainer today, with no clear catalyst behind the rally. Perhaps it was due to investors adding to bets that the BoJ could hike rates again sooner rather than later after a Reuters poll showed that most economists expect another hike this year, most likely during the third quarter. The technical break of dollar/yen below the key support zone of 151.00 may have invited more yen bulls into the game.

With market participants assigning an 85% probability of a July 25bps hike, attention tonight will turn to Japan’s Nationwide CPI data for January. The Tokyo prints for the month revealed that headline inflation accelerated to 3.4% y/y from 3.0%, and thus, a similar acceleration in tonight’s prints could corroborate the notion of a summer BoJ hike and perhaps add more fuel to the yen’s engines.

The euro, which has been mainly driven by headlines on Russia and Ukraine, extended its pullback yesterday on signs of more tension. After US President Trump claimed that Ukraine was to blame for Russia’s invasion, Ukrainian President Zelenskiy responded by saying that Trump was trapped in a Russian disinformation bubble. Trump called Zelenskiy “a dictator without elections” and said he better move fast to secure a peace deal.

S&P 500 and gold enter uncharted territory again

On Wall Street, equities continued to drift north, with the S&P 500 hitting a fresh record high. Although Trump threatened to impose tariffs on cars, chips and pharmaceuticals, he said yesterday that “it’s possible” for the US and China to have a new trade deal.

His remarks add more credence to the view that he is using tariffs as a negotiating tactic and that he may take them off the table if he secures common ground with the US’s main trading partners.

Despite this, uncertainty still lingers, and this is evident by the fact that although investors are willing to continue buying stocks, they are also buying gold, which is considered the ultimate safe haven recently. Gold hit a fresh record high today at around $2,955, with the bulls appearing willing to continue marching north.