FOMC Minutes to Shed Light on Officials' Hawkishness

Ironically, the dollar has been stronger with the debt ceiling debate as investors look for safety, but will the Fed add to potential strength by suggesting another rate hike is coming?

Perspectives Changed Amidst the Banking Crisis

Immediately after the last FOMC meeting, the impression was that the changed wording in the accompanying statement indicated that the Fed would most likely pause at the next meeting. Inflation has been coming down, and the conventional wisdom among economists is that it takes time for the full effect of rate hikes to be seen – the banking crisis has a similar effect as a rate hike in inflation, and the Fed shouldn't overtighten. Since then, headlines have been dominated by the debt ceiling, but the Fed could come back into focus with the release of the FOMC minutes later today.

For better or worse, the debt ceiling issue will be addressed long before the Fed meets next. The government's cash is expected to run out as soon as the start of June, and the Fed won't meet until two weeks later. Expectations of what the Fed will do at the next meeting revolve around inflation expectations, not the debt ceiling.

Majority Expect Pause, Will Minutes Support it?

Traders are likely to be interested in the tightening positioning of each FOMC member. Recent comments have been more on the hawkish side, including from Fed Chair Jerome Powel. But, the market appears to be pricing in an expectation that the Fed will hold steady, with three-quarters of traders expecting a pause, while the rest expect a 25bp hike.

By contrast, the ECB is expected to keep hiking for several more meetings, narrowing the shared economy and the US rate gap. For now, the dollar might be picking up a bit of strength with higher yields as traders worry about the ramifications of brinkmanship over spending in Washington. But when that's resolved, the Euro might catch up on the yield differential a little more - unless the FOMC minutes heavily imply another rate hike is coming.

EUR/USD Forms Double Bottom

The wedge pointing to $1.1126 has proven detrimental to the price of EUR/USD as the exchange rate has dropped substantially since, forming a double bottom to $1.0774 as of yesterday, Tuesday. If the typical pre-event price action were to play out, the pair might consolidate until the minutes offer more clarity and a breakout or breakdown.

The former would require quite the dovish minutes, given that the next major resistance levels lie at $1.0845. It might not transpire into prices immediately, but probably in the medium term, should there be a dovish case, leading to the next crucial swing of $1.0923. The downside potential seems restricted by the golden pocket, shown at $1.0767, with a slide below there exposing the next round support at $1.07.

Key Takeaways

The FOMC minutes, due to be released later today, could shed light on whether another rate hike is coming despite three-quarters of traders expecting a pause. The market appears to be pricing in an expectation that the Fed will hold steady, but if the minutes heavily imply another rate hike is coming, the Euro may struggle against a strengthening dollar due to higher yields. Traders are interested in the tightening positioning of each FOMC member as recent comments have been more on the hawkish side.