FX.co ★ EUR/USD: Dollar's moment of glory amid Fed minutes

The minutes of the June Federal Reserve meeting, published Wednesday, provided support for the U.S. dollar. The document reflected the hawkish sentiment of the central bank members, who are ready to continue raising interest rates. In response to this release, the U.S. dollar index reached a new local (weekly) high, and the major dollar pairs adjusted accordingly. In particular, the EUR/USD pair declined to 1.0834 (the lowest level of the current month).

Although sellers were unable to maintain their positions, the dollar received support primarily due to the rise in hawkish expectations. The probability of a rate hike at the July meeting has increased to 95% (according to data from the CME FedWatch Tool), which helped the greenback stay afloat. However, it should be emphasized that this support is temporary and situational in nature. Very soon, the market will shift its focus to Nonfarm Payrolls, which can either strengthen or significantly weaken the dollar.

But let's get back to yesterday's release. As a reminder, at the June meeting, the Federal Reserve paused its interest rate hikes but indicated that it was just a pause, not the end of the current monetary policy tightening cycle. The accompanying statement was optimistic, with the central bank noting that economic activity continues to grow at a "moderate pace," as indicated by recent macroeconomic indicators. The Federal Reserve downplayed the negative aspects (such as disappointing ISM indices) and focused on the positive sides of the Nonfarm Payrolls. The central bank mentioned that there has been "a significant increase in employment" in recent months, and the unemployment rate remains low.

The published minutes of the Federal Reserve yesterday reflected the hawkish sentiment of the majority of committee members. For example, despite the decision to maintain the status quo, some officials advocated for a 25 basis point rate hike in June. Moreover, the central bank, so to speak, explicitly announced further tightening of monetary policy. The document stated that almost all meeting participants emphasized that they considered it appropriate to further raise the target federal funds rate during the current year. This confirmed the hawkish dot plot, updated at the June meeting. It is worth noting that the forecast for the year-end target rate was revised upwards, implying two more rate hikes this year.

The hawkish tone of the Fed minutes provided support to the dollar across the market. Key Wall Street indices incurred minor losses yesterday, and the yield on 10-year Treasury rose to the highest level since March, surpassing the 3.9% target. The EUR/USD currency pair attempted to break out of the 1.0850–1.0930 range, within which it has been trading for the second consecutive week, riding on the strengthening of the greenback. However, it became clear today that the dollar only received situational support. The EUR/USD pair returned to the range mentioned above, although it is currently trading near its lower boundary.

The thing is, the Fed minutes didn't become a sensation, whereas a "sensation" was needed to break the situation in the EUR/USD pair. The document only confirmed the hawkish sentiment of the majority of central bank members, but this fact was not a revelation. The main theses of the minutes had already been voiced in public by the head of the Federal Reserve and some of his colleagues. Fundamentally, the backdrop for the EUR/USD pair has not changed: before the release of the minutes, the probability of a 25 basis point scenario in July was 75%–80%, and after the release, it increased to 95%. However, the market is still almost certain that the Federal Reserve will maintain its monetary policy parameters as they are at the September meeting (the probability of maintaining the status quo is 75%).

In other words, the dollar effectively priced in the July rate hike: macroeconomic factors that increase the likelihood of this scenario have a weak impact on the greenback's positions. The published minutes strengthened the market's confidence regarding the July rate hike, but at the same time, hawkish expectations regarding the Federal Reserve's future actions remained unchanged. That's why the EUR/USD bears received only temporary support and were unable to establish themselves below the level of 1.0850 (i.e., below the lower boundary of the price range of 1.0850–1.0930).

Now all market attention will be focused on the Nonfarm Payrolls. This release has the potential to "calibrate" market expectations regarding the Federal Reserve's future actions after the July meeting. However, this will only be the case if the key indicators of the release deviate from the forecasted course. According to forecasts, a decline in unemployment in the U.S. to 3.6% and an increase in the number of employed by 222,000 are expected in June. The wage indicator should demonstrate a downward trend, reaching 4.2%.

Prior to the release of the Nonfarm Payrolls, the EUR/USD pair will likely trade within the range of 1.0850–1.0930. Downward price "spikes" should be treated with caution as the Friday release can provoke increased volatility in the pair, both in favor and against the dollar. At the moment, there are no compelling reasons for a stable downward (or upward) movement.