The release of last month’s FOMC minutes is one of the most important events for the foreign exchange market this week but minutes do not always have the same impact on currencies as the initial rate announcement. We already know that the Federal Reserve’s decision to reduce asset purchases by another $10 billion last month was unanimous. While U.S. economic data took a turn for the worse, the central bank completely ignored the deterioration and said further improvement is seen in labor market conditions and economic activity “picked up” from the previous month.

Yet given the continued weakness in U.S. data, investors can’t help but be skeptical of the Federal Reserve’s optimism. Going into today’s release, market participants will be looking for any sign of concern about recent weakness in U.S. data and its possible impact on the pace of tapering. Unfortunately we think everyone will be sorely disappointed because Bernanke made it very clear at his last meeting that they are optimistic about future economic activity. With only one weak non-farm payrolls report on hand, there was not enough reason for the central bank to shift course. In a sign of unusual solidarity, this was also the very first time since June 2011 that the decision was unanimous, reflecting the influence of the new slightly more hawkish FOMC. Unless the minutes contain a completely tone from the FOMC statement, we do not expect a significant reaction from the U.S. dollar. In fact, it may serve as reminder to the market that barring a sharp contraction in the U.S. economy, the central bank will look to end Quantitative Easing this year.

However even if the minutes reflect the same optimism as the FOMC statement, we don’t expect excessive demand for U.S. dollars as the additional deterioration in U.S. data since January raises the risk of less optimism in March. This morning’s housing market reports were extremely weak with housing starts dropping 16%, the largest amount in 3 years and building permits falling 5.4%. Producer prices rose slightly by 0.2% but the rise in inflationary pressure is too small to raise concerns within the central bank.

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