- FOMC will release the minutes of the June policy meeting on Wednesday, July 6.
- Markets have nearly fully priced in another 75 basis points rate hike in July.
- Investors will pay close attention to discussions around the September rate decision.
The US Dollar Index (DXY), which tracks the greenback’s performance against a basket of six major currencies, surged above 106.00 and reached its highest level in nearly two decades on Tuesday. The widening policy divergence between the US Federal Reserve and other major central banks, especially the European Central Bank, continues to boost the dollar. Additionally, the currency capitalizes on safe-haven flows with investors growing increasingly worried about a global recession.
The US Federal Reserve will release the minutes of its June meeting, at which it decided to hike the policy rate by 75 basis points (bps), on Wednesday, July 6.
Neutral scenario
The CME Group FedWatch Tool shows that markets are pricing in a 93% probability of another 75 bps rate increase in July. Hence, it would be surprising to see a market reaction in case the Fed’s publication confirms such a policy move later in the month. Cleveland Fed President Loretta Mester, San Francisco Fed President Mary Daly and Fed Governor Michelle Bowman are among Fed officials who openly said that they would support a 75 bps rate hike in July.
Additionally, the Commodity Futures Trading Commission’s (CFTC) latest Commitments of Traders (COT) report showed that net long dollar index positions declined last week after having climbed to their strongest levels in early June. Hence, a “buy the rumour sell the fact” market action could cause the DXY to stage a technical correction. Moreover, the index remains technically overbought following Tuesday’s impressive rally.
Hawkish scenario
Currently, there is a more-than-80% chance of a 50 bps rate hike in September. This market positioning suggests that there is room for a hawkish surprise in case the minutes reveal that policymakers are willing to consider one more 75 bps hike in September if they don’t see any signs of inflationary pressures easing until then. In that scenario, the benchmark 10-year US Treasury bond yield, which fell by nearly 10% in the last two weeks, could regain traction and help the dollar preserve its strength.
The Fed’s Summary of Economic Projections, the so-called dot plot, showed the median view amongst policymakers is that interest rates will end 2022 at 3.4%, well up from 1.9% in March’s dot plot. Currently, the federal funds rate is 1.5%-1.75%, leaving room for a total of 175 bps hikes in the last four meetings of the year. Two more 75 bps rate hikes in July and September could open the door for the policy rate to come closer to 4% toward the end of the year unless the Fed unexpectedly decides to pause rate increases.
Dovish scenario
If the minutes unveil that policymakers refrain from committing to a specific size of a rate hike after July and want to see how the economy and the inflation outlook develops, this could be seen as a dovish tone and trigger a dollar selloff. It’s worth noting that the latest PMI surveys from the US displayed that the business activity in the private sector lost significant growth momentum in June. Market participants could start pricing in a less aggressive tightening stance in the last quarter of the year if they see that policymakers are worried about tipping the economy into recession.
Conclusion
Investors are trying to figure out whether or not the Fed will continue to sacrifice growth to battle inflation. Since a 75 bps rate hike in July is nearly fully priced in, the minutes of the June policy meeting will be looked upon for fresh clues regarding the policy stance in the fourth quarter. Unless investors are convinced that another 75 bps hike in September is more likely than not, the DXY could find it difficult to push higher and make a downward correction. Nevertheless, with the greenback holding its status as a safe haven, a Fed-inspired dollar selloff should remain short-lived.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended Content
Editors’ Picks
EUR/USD drops below 1.0800 after German Retail Sales data
EUR/USD has come under fresh selling pressure and trades below 1.0800 after the data from Germany showed that Retail Sales declined by 1.9% MoM in February. Resurgent US Dollar demand is adding to the downside in the pair. US data are next in focus.
GBP/USD stays weak near 1.2600 amid market caution
GBP/USD remains defensive near 1.2600 in European trading on Thursday. The hawkish tone from Fed Governor Christopher Waller keeps the US Dollar afloat amid a cautious trading environment ahead of key US data releases and the Good Friday trading lull.
Gold price holds strength ahead of US core PCE inflation
Gold price holds onto gains near $2,200 in Thursday’s European session. The precious metal exhibits firm footing ahead of the United States core PCE Price Index data for February, which will be published on Friday.
XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC
XRP programmatic sales ruling by Judge Torres was completely rejected by another US Court that ruled in favor of the SEC in a lawsuit against Coinbase.
Portfolio rebalancing and reflation trades emerge into Q2
Yesterday’s price action pointed at a possible end-of-quarter portfolio rebalancing as the session saw the laggards of the quarter like Apple and Tesla gain, and the stars like Microsoft and Nvidia retreat.