Fed Discounts the Yield Curve Control – USD Rises
Yesterday’s FOMC Meeting Minutes brought the much-awaited dollar reversal. Not that the minutes contained something new – profit-taking is most likely the reason why the dollar trend changed.
Even before the minutes’ release, EURUSD fell from its 1.1950 intraday high to below 1.1880. The minutes pushed it even lower, reaching 1.1830, with little or no follow-through. Some other USD pairs reacted even harder – AUDUSD, for example.
So what was new on the Fed’s minutes? If we are to look for a particular reason, the only new thing coming out of the minutes is that the Fed is not really interested in yield curve control measures. In fact, the minutes specifically mentioned that the yield caps would provide only modest benefits in the current environment.
Two things are worth mentioning here – the strong rejection and the mention of the “current environment.” In other words, the yield curve control measures may be discounted this time, but not eliminated as a potential monetary policy tool in the future.
Why Did the USD Move?
It was about time! The bearish USD trend started in early April with little or no corrections. For example, the EURUSD move from 1.12 to 1.19 had not seen a correction bigger than a hundred pips. In other words, the market kept pushing higher and higher, and shorts were squeezed like lemon juice.
The extreme weakness in USD was seen not only on the EURUSD pair, but on all the USD pairs. GBPUSD fell the hardest, while the AUDUSD corrected too. However, we cannot say that that USD reversed sharply. The move from the lows looks small when compared with the strong downtrend in the last months.
In fact, by the time London opened today, EURUSD is less than a hundred pips lower from the highs. It keeps finding support from the crosses, as EURGBP and EURAUD continue to trade with a bid tone every time the USD corrects.
Coming back to the Fed, it disregarded the yield curve control for now, and one of the reasons presented was that it might lead to excessive balance sheet growth. It means that the Fed does not consider the current level of the balance sheet and its growth path as excessive, despite the fact that it is one of the reasons that led to a lower USD.