The minutes of the last Fed meeting was a surprise for investors, despite the fact that Powell at the press conference clearly outlined the course for policy tightening. Inflation in the US is on the rise and the covid is expected to only fuel this trend, so the central bank needs decisive action to maintain price stability. Minutes showed that officials discussed an increase in the pace of curtailment of asset purchases, as well as a transition to a rate-hiking cycle earlier than expected, while the document said that this opinion is shared by “many” of the participants, that is, the consensus tends to increasing the pace reduction of monetary support for the economy. In other words, at the next meeting, the Fed goal will most likely be to communicate the plans about a rate hike already in the first quarter of 2022. Previously, this scenario was not a baseline, although it figured in the forecasts of large US investment banks.

Equity markets, as expected, reacted negatively to the news; one of the important barometers of investor risk preferences, the crypto market, also tanked right after the release of the Minutes, which clearly illustrates what was the key driver behind crypto rally in 2021. Treasury yields also reacted accordingly, pushing through the previous local high (1.7%), although it should be noted that the scenario of Fed becoming more decisive in its response to inflation has been priced in since the beginning of the year, when 10Y Treasury yields began to rally sharply from the 1.5% pivot point:

The dollar reacted positively to the news, but somewhat trimmed gains today. Speculations about what the next step will be for the Fed is unambiguously favoring the strengthening of the dollar, since other central banks, in particular those with low-yielding currencies, cannot offer a compelling counter-argument to the Fed’s stance. Nevertheless, it should be noted that, for example, the German sovereign debt market is trying to price in that the ECB will follow the suit of the Fed - the yield on 10-year bonds opened with a gap up and is trading in the area of -0.04% at the time of writing. This is a highest level for two and a half years.

With increasing attention from central banks, including leading ones, to the outlook for inflation, today's German inflation report could spark a strong market reaction, especially if the forecast that price pressures have peaked in the main Eurozone economy is confirmed. Annual inflation in December is projected at 5.1%, anything below is likely to weaken the euro against the dollar, setting the stage for a breakout below 1.13:

Some support for EURUSD is provided by risk-off in the market - European investors are trimming their investments in foreign risk assets and the outflows are offering support to the common currency. When the fall in risk assets stabilizes, one can expect that the selling pressure on EURUSD will subside too

The upside potential for the dollar is expected to become more evident today after the release of ISM's services PMI report. Two sub-indices will be of primary importance - incoming prices and hiring. The second indicator will allow you to estimate what kind of surprise to expect from the NFP report. The Omicron wave in the US could have held back hiring and a weak NFP print may well be attributed to the continuing imbalance between strong labor demand and a shortage of labor supply. The dollar is likely to focus on wage growth rather than job creation, as this is now a key proxy for labor market imbalances and a possible Fed’s aggressive shift in stance.