US dollar index stays calm after the Fed warning

The US dollar index (DXY) moved sideways after the Federal Reserve published minutes of the past meeting. It is trading at $96.15, where it has been in the past few days.

FOMC minutes

The Federal Open Market Committee (FOMC) held a meeting three weeks ago as the number of Covid-19 cases was starting to increase. 

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In that meeting, the bank decided to double the size of its quantitative easing tapering from $15 billion to $30 billion. With that pace, the bank will end the program in March this year.

On Wednesday, the Fed published the minutes of that meeting. The minutes said that the bank may need to hike interest rates sooner or at faster pace than it had hinted in the other meeting. 

Analysts expect that the Fed will end its QE in March and immediately hike interest rates by about 0.25%. It will then implement three more hikes in 2023 and two more in 2024. The minutes said:

“Some participants judged that a less accommodative future stance of policy would likely be warranted and that the committee should convey a strong commitment to address elevated inflation pressures.”

NFP ahead

The next key catalyst for the US dollar index will be the latest US non-farm payroll (NFP) data. These numbers are expected to show that the country’s labour market did well in December even as the number of cases rose.

Precisely, analysts expect the data to show that the economy added more than 400k jobs in December after it added a further 240k in November. The unemployment rate is also expected to have fallen to 4.1% in December.

On Wednesday, data by ADP showed that the economy added more than 800k jobs. However, in the past, the ADP figure has often differed substantially from the official number.

A higher than expected NFP will be bullish for the DXY index because it will give the Fed an incentive to implement more hikes.