Tuesday, June 30, 2020

Will this week’s FOMC meeting minutes be more dovish than expected?

  • Dollar
  • FOMC minutes
  • DXY


Analysts’ Pick: Will this week’s FOMC meeting minutes be more dovish than expected?

  • Fed Chair Jerome Powell will likely continue to reiterate his comments on uncertainty and the potential damage to the economy should stimulus measures be rolled back during his testimony to Congress on Tuesday in the US.
  • ISM’s Manufacturing PMI report will likely continue to improve, although the headline figure will continue to be a misrepresentation of the US economy.
  • Change in NonFarm payrolls should continue to show net hiring in the US economy, supported by falling layoffs and lower continuing benefit claims.
  • Positive economic data in the US may tilt sentiment away from risk aversion but high levels of geopolitical risk and Covid-19 fears may materialise along the week.

From Fed Chair Jerome Powell's testimony to the House Financial Panel in the early hours of Wednesday (12.30am GMT +8) to employment data from the US Bureau of Labor Statistics (BLS), this week's outlook for the Dollar Index may be tilted towards the downside.

Higher Frequency data implies that the US continued to experience an economic recovery through June


Powell is likely to mostly reiterate his recent statements since the previous FOMC monetary policy meeting earlier in June and comment on the high uncertainty surrounding the Covid-19 pandemic and its economic impacts. The labour market will also likely be one of his key points, with unemployment continuing to hover at record high levels. The cessation of the additional US$600 in unemployment benefit at the end of July will likely be a key topic as well as policymakers deliberate their next move to support the US labour market. Powell is likely to indirectly call on more stimulus from the government to help support the US economy, as will US Treasury Secretary Steven Mnuchin, who will be testifying with Powell. It should result in some additional optimism from investors on the prospects for more stimulus measures by the US government as a result.

ISM's Manufacturing PMI report for June will likely continue to show improvements thanks to easing lockdowns and generally improving business sentiment as compared to April. But the headline figure will still likely be inflated by slow supplier deliveries resulting from the global supply chain, although to a lesser extent compared to previous months. The employment sub-index should show improvements, signalled by declining layoffs. But it will likely remain at low levels, since rehiring and new hires are likely slower than anticipated.

Declining pace of new Covid-19 cases in the US during the period from end May to mid-June will likely helped drive both consumer and business sentiment before the sudden spike in cases towards the end of June


Similarly, June’s new orders are likely to show improvements as well, being supported by continued spending on consumer staples as well as being lifted with more businesses starting to reopen as lockdowns continue to ease. The increase in Covid-19 cases towards the end of the month is unlikely to largely impact tomorrow's dataset, despite several large corporations announcing closures of their retail stores. Production may increase faster-than-anticipated with more factories reopening and increasing output to meet demand over the closures. The index as a result may be able to beat economists' estimates of 49.0, to range closer towards expansionary and baseline territory for the manufacturing sector. It is however important to note that the headline figure is still likely not an accurate reflection of the real economy in the US.

Increasing consumer spending in May signals that a similar trend will continue to be seen in June, putting upward pressure on production and new orders to meet consumer demand


The meeting minutes for the FOMC's monetary policy meeting earlier in June is set to be released on 2pm (GMT +8) on Thursday this week. Traders will likely be focused on Fed policymakers' discussion on yield curve control as an additional tool to the Fed's current arsenal of monetary policy tools. This is due to the little insight on the topic in both the Fed's monetary policy statement and during Powell's press conference following the decision, despite noting that several other Fed policymakers had raised questions on the issue. There may be some dovish signals in the Fed's discussion of the implementation of the tool, despite it being unlikely to be rolled out in the near future. Another point of focus is likely to be the forward guidance from the Fed, which may include insights on unemployment and the multitude of lending facilities that the Fed has rolled out but has seen little interest. In general, employment should remain a key proxy for the Fed's future decisions in policy making. We do expect some deliberation on possible changes to the Fed's lending facilities as well, which would imply an overall dovish sentiment from policymakers. Finally, the dot plot published after the meeting in June signals that Fed policy makers are unanimously more pessimistic on the economic outlook for the US. This should provide the greenback with some slight downside as well, since the likelihood that the minutes suggest that the Fed is willing to do more in terms of stimulus measures is higher.

The Fed’s dot plot showed members with a unanimous outlook for 2020 and 2021


Employment figures from ADP (private employment change) and BLS will likely be tilted to continue to show an improvement from May. The net layoffs seen in May’s private employment report from ADP in contrast to the official employment change dataset from the BLS will likely reverse course in June. Initial Jobless claims and continuing claims will be a better indicator for the official dataset (despite recent inaccuracies due to the high volatility) instead. With negative sentiment peaking in March and April, employment figures should experience some support from rehiring and slower layoffs, as signalled by employment benefit claims. The June payroll report will likely only reflect the period where the pace of new Covid-19 cases in the US were declining, implying that the dataset will likely have a boost from better consumer and business sentiment, which should tilt the dataset towards a more positive outlook for the US labour market.

Both continuing and initial jobless claims continued to decline through the period relative to the June unemployment report


As a result, the Dollar Index may have some room to fall on the above releases as optimism continues to outweigh the fears surrounding the increasing new Covid-19 cases in the US, possibly towards 97.11's level over the week. There is increasingly growing volatility in financial markets however, which puts a growing amount of risk on short-term movements regarding the dollar since the greenback is impacted by both safe haven demand and the outlook for the US economy. Upside risks will include retaliatory actions from China to oppose the US' decision on Monday to suspend its special trading partner status with Hong Kong, as well as renewed lockdown restrictions arising from the increasing Covid-19 infections in the US.

Technical Analysis:


Bulls are currently pushing DXY back higher following news of a spike in new Covid-19 cases in the US which likely drove demand for the greenback’s safe haven properties higher in the short-term. Overall, the Ichimoku cloud signals that the index has shifted into a bullish bias although there is no buy signal yet. Potentially positive economic data in the US this week may help shift financial markets towards to a more risk-on sentiment, possibly putting downward pressure on the Dollar Index towards 97.11’s level which should push DXY’s pricing closer towards a buy signal from the Ichimoku cloud indicator. Upside risks may also put upward pressure on the Dollar Index, although it may be difficult to break the 61.8% Fibonacci retracement level at 97.87. A surge above the 200-day moving average looks to be unlikely in the short-to-medium-term as well.

Support: 97.11 / 96.44 / 95.80

Resistance:  98.16 / 98.61 / 99.30

DXY Chart (H4)