AUD/USD retreats from weekly highs near the 100-DMA after Fed’s December meeting minutes

• The AUD/USD slides some 0.11% after Fed’s last meeting minutes.
• Federal Reserve policymakers said that conditions for a rate hike could be met sooner than estimated.
• Fed officials added that the pace of rate hikes could be faster “than participants anticipated.”
• Fed policymakers eye the possibility of reducing the balance sheet after the first rate hike.

The AUD/USD pares Tuesday’s gains during the New York session after the Federal Reserve minutes showed that most Fed members judged that conditions for hiking rates could be met relatively soon if the labor market “improvements continued.” The pair is trading at 0.7229 at press time.

Summarize of Federal Reserve December 14-15 minutes

Federal Reserve policymakers decided that monetary policy accommodation was no longer necessary, attributed to high inflation pressures and improved labor market.

Regarding hiking rates, “most participants” judged that conditions for a rate hike could be met relatively soon IF the labor market improvements continued. Further added that “given the outlooks for the economy, labor market and inflation, it may become warranted to increase the Federal Funds Rate sooner or at a faster pace than participants had anticipated.”

Concerning the reduction of the balance sheet, Fed officials said that  “it could be appropriate to begin to reduce the size of the Federal Reserve’s Balance sheet relatively soon after beginning to raise the Federal Funds Rate.”

Federal Reserve members noted that inflation has been running above the 2% target, reflecting supply and demand imbalances, blamed on the pandemic and the reopening of the economy. Talking about the Covid-19  new variants, the Committee said they “pose downside risks to economic activity and upside risks to inflation.”

In the meantime, Fed funds futures priced in an 80% rate hike in March, after December’s meeting minutes.

Market’s Reaction

The AUD/USD extends its initial slide from 0.7265 down to 0.7229, breaching below the confluence of the 100 and the 200-hour simple moving averages (SMAs), while US 10-year bond yields rose to 1.712%, for the first time since October 2021.

At press time, the AUD/USD keeps pushing lower, aiming for the intersection of the 50-hour SMA and the daily pivot around 0.7224-26.