Minutes to Clear Confusion on Forward MonPol

After the last meeting, there were doubts about how serious the Fed was about raising rates at least twice this year. Now we will get a more definitive answer.

Clearing Up The Confusion

Following the last rate decision, it appeared that the FOMC members' views were a bit different from what was being communicated by Fed Chair Jerome Powell in the post-rate decision press conference, as he played down references to "skipping" a rate hike. The dot-plot matrix implied two more rate hikes this year, a view that was repeated by Chair Powell as recently as last week at the ECB forum at Sintra.

Markets have largely adjusted to the two expected hikes, but there is some difference of opinion on timing. This could lead to the potential reaction after the release of the FOMC minutes, where investors will be looking for clarification of the pace of rate hikes. It's not the same for the markets if there are two consecutive hikes or if they are spaced throughout the next three or four meetings. Chair Powell last week also said that consecutive rate hikes are not off the table.

What The Outlook Is

Most traders are now expecting a rate hike at the next meeting, making the hold from last month a "skip". What happens after that is still debatable, and the market does not believe the Fed regarding how far rates will rise. Over 70% expect another hold in September; after that, only 37% believe the Fed will make good on the promise of two rate hikes this year (a small group sees a rate hike followed immediately by a cut).

The issue at stake is the economic growth forecast. The Fed is more optimistic than the market, expecting only a mild recession this year, allowing it to keep rates high to bring down inflation. The market expects a harder landing that would force the Fed to cut. The Fed's GDPNow forecast tool sees annualised growth of 2.2% for the second quarter, while the consensus among economists is under 1.0%. How optimistic FOMC members are about the economic outlook might be the catalyst to convince traders that they will go through with the second hike - or convince more to join the majority that says the Fed will reach its terminal rate at the next meeting.

EUR/USD

The 4-hour chart of EUR/USD suggests the pair is correcting into a flag-like pattern, with a bottom in at $1.08350 and a top at $1.1013. Using the measured-move projection, an upward breakout will open the door to $1.1189, with interim resistances at $1.1096 and $1.1150. Conversely, sliding under the swing low will expose $1.0780, and the regional support at $1.0639 should $1.0700 succumb to potential pressure.

Source: SpreadX / EURUSD

Key Takeaways

The release of the minutes is expected to provide a clearer understanding of the Fed's stance on interest rates. While the dot-plot matrix indicated two more rate hikes, Fed Chair Jerome Powell downplayed the idea of "skipping" a rate hike, and investors are looking for clarification as the market remains divided on whether they will occur consecutively or spaced out over several meetings. The discrepancy lies in the economic growth forecast, with the Fed being more optimistic about a mild recession and maintaining high rates to combat inflation, while the market predicts a more severe downturn that would necessitate rate cuts.