Wednesday could turn into a perplexing day for the US dollar, as investors may find themselves wondering whether or not monetary stimulus may remain super accommodative in the year ahead. On the one hand, the minutes of the Federal Reserve’s January policy meeting (19:00 GMT) could remind markets that tapering bond purchases would be a premature decision given the current conditions. On the other hand, retail sales (13:30 GMT) may raise doubts about how firm the decision to refrain from tapering actually is.
Of course, much depends on the race between the vaccine immunization effect and the liquidity provided to support the economy until the end of the pandemic. But the US seems to be moving in the right direction so far, unlike its eurozone counterparts. The coronavirus outbreak has slowed to the lowest point in four months and recent data releases, although not exciting, have been a relief despite the lockdown restrictions and that the much-awaited stimulus checks from the government have not arrived yet, with the unemployment rate further decelerating to 6.3% in January and the core PCE inflation index rebounding to 1.3% y/y.
Searching for policy clarification
Retail sales for January, which are a key proxy for consumption, could be another positive print on Wednesday as investors expect a remarkable monthly rebound of 1.0% from -0.7% previously. If true, investors may reconsider the Fed’s stance, likely questioning whether the central bank might have sounded more dovish than it should in January and if it could still alter its forward guidance later this year. Therefore, the FOMC minutes will be carefully read later in the day for any clarification ahead of next week’s policy meeting. Still, Powel would not like to repeat the 2013 sell-off in debt markets before the pandemic risks fade. Hence, he may wisely choose to play it safe for now, avoiding any communication twists.
Industrial production for February could also gather interest before the minutes at 14:15 GMT, though the results may not be something to celebrate if the monthly expansion gets squeezed from 1.6% in January to 0.5% as analysts expect. Nevertheless, such a decline would not be abnormal and could be shrugged off. A similar reaction could occur on Thursday if the US flash Markit PMIs for February drop from six-year highs, but hold comfortably within the expansion area as forecasts suggest.
Market reaction
Turning to the dollar, the risk-on trading tendencies have been a headwind for the currency fueled by the vaccine rollouts, the slowing infections, and hopes that the US president could still pass a decent stimulus package not far from the $1.9 trillion plan he initially promised.
However, following the steep decline in the safe-haven yen this week, the greenback managed to trim its losses against its Japanese counterpart and bounce back above the 105.00 level and near the crucial 200-day simple moving average (SMA). The rebound could see further extension if retail sales arrive stronger than expected, with the pair likely surpassing its previous high to challenge the resistance zone of 106.00 – 106.55 and the topline of the short ascending channel. If that is the case, the meeting minutes could next test the upper boundary of the channel, and unless the central bank uses a surprisingly more dovish writing style, bringing the supportive trendline at 104.85 under the spotlight, the report may not block the way higher.
Note that stimulus talks in the Senate may intensify following the conclusion of Trump’s impeachment trial. 
