Scheduled for release tomorrow at 02:00, the US Federal Reserve's monetary policy meeting minutes correspond to the July 28-29 rate decision. At that time, the central bank opted to hold the benchmark interest rate steady at 3.5% to 3.75%, and the market's rate hike expectations suffered a significant blow, leading to a sharp drop in the dollar index and a rise in gold on that day.
Following the release of these minutes, there is potential for a fresh wave of speculation regarding the waning of Fed rate hike expectations. Investors should be wary of sharp fluctuations in the dollar and gold, with the potential for a negative impact on the dollar index while benefiting precious metals and non-US currencies.
Since July 28, the dollar index has shown a short-term depreciation trend, influenced by the coordinated intervention in the yen by US and Japanese authorities. This depreciation is largely artificial rather than market-driven. There remains a possibility of secondary intervention measures by both nations, and some major hedge funds have already begun closing their short yen positions. Retail traders should also exercise caution regarding the yen's exchange rate.
Tensions between the US and Iran are showing signs of easing. While international oil prices remain near the $80 mark, the momentum for further gains is noticeably weakening. International energy prices are a key determinant of the trajectory of US inflation. Should US inflation data show a significant retreat over the coming month, the likelihood of a Fed rate hike would diminish significantly, potentially paving the way for a resurgence of the dollar index's bearish trend.
WTI crude is currently stable near $85. Until the US-Iran situation is resolved, this price level appears to reflect a genuine supply-demand balance, making a significant breakout in either direction unlikely unless there is a dramatic shift in the news flow.
Chart 1, EURUSD and Fed rate curve overlay over the past decade - ATFX
As the chart illustrates, the EURUSD trajectory generally maintains an inverse relationship with the Fed's rate curve. When the Fed enters a rapid hiking cycle, EURUSD tends to depreciate sharply, as seen in the pattern from 2022 through late 2023. Exceptions exist, such as the period before 2018 when EURUSD appreciated quickly despite ongoing Fed hikes, driven by robust eurozone economic growth and the ECB's tightening monetary policy with a substantial reduction in QE allowances. In the absence of external disruptions, the inverse correlation between EURUSD and Fed rates is likely to persist.
With the Fed holding rates steady at 3.5% to 3.75% throughout its meetings this year, EURUSD has been confined to a sideways range between 1.1324 and 1.2081. Although the dollar index fell sharply after the Fed's decision to hold again in July, this decline is insufficient to alter the medium-term range-bound pattern for EURUSD. Our view is that during US trading hours today, following the release of the Fed minutes, the dollar index could see another emotional dip, but the decline should be noticeably narrower. The impact on gold and non-US currencies may be less pronounced.
Chart 2, CME FedWatch Fed rate hike probability - ATFX
According to CME's rate monitoring tool, the probability of a 25-basis-point rate hike by the Fed in September stands at only 34.4%, making a hike nearly implausible. The probabilities for October, December, and January of next year all remain below 46%, which is also a relatively subdued level. As the expectation of further Fed hikes continues to diminish, the likelihood of the dollar index breaking down from its sideways consolidation increases. Of course, the underlying uncertainties lie in international energy prices and the direction of US inflation. Only with sustained easing of inflation will Fed hike expectations cool, thereby driving the dollar index lower.
ATFX Risk Disclosure, Disclaimer, and Special Statement: The market carries risk, and investment requires caution. The above content represents only the personal views of the analyst and does not constitute any operational advice. Please do not treat this report as your sole reference. Analyst opinions may change over time, and updates will not be separately notified.
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