Currency markets are quiet Wednesday morning. Everyone waiting for the same thing. Fed minutes from Kevin Warsh’s first meeting as chair. Question is whether those minutes actually tell us anything new.
Why EUR/USD Has Been Falling
EURUSD is sitting near $1.14 to $1.1430 early Wednesday. Barely moved overnight. Traders in wait and see mode before the minutes land.
Euro has lost roughly 3.7% or about 450 pips since mid April. Slow steady decline that reflects one simple thing. Dollar has more yield behind it right now and investors follow yield. US rates at 3.5% to 3.75% versus much lower European rates keeps capital flowing toward dollar assets. That dynamic has not changed and until it does the euro stays under pressure.
Dollar bulls have been in control for most of this stretch. Geopolitical headlines keep creating noise but the underlying interest rate story keeps bringing dollar buyers back every time the pair bounces.
What Fed Minutes Could Mean for EUR/USD
Fed kept rates unchanged at 3.5% to 3.75% at the June 17 to 18 meeting. Nine policymakers projected at least one more rate hike before year end. Warsh himself did not submit an economic forecast which was unusual and got a lot of attention at the time.
Warsh also changed the format of the policy statement. Trimmed it down to just over 130 words. Dropped the forward guidance language that Powell used to hint at future rate moves. Shorter and less committal than markets were used to.
If the minutes follow the same streamlined approach they may not give traders much to work with. Less detail than the Powell era meetings became known for. Warsh’s philosophy is more thinking less talking and the minutes might reflect that directly.
One thing that has changed since the meeting is energy prices. US-Iran memorandum of understanding briefly eased some oil pressure after the meeting. That took a bit of urgency out of the inflation conversation even though attacks resumed this week and oil is climbing again.
How Fed Minutes Could Move EUR/USD
Rate hike by end of year is already priced in. Futures markets have had that baked in for weeks. For the minutes to actually move the euro dollar pair they would need to reveal something that changes that pricing. Either more hawkish than expected or less hawkish.
More hawkish scenario. Minutes show officials debating whether June itself should have been a hike rather than a hold. That would push rate hike timeline forward and give the dollar another leg higher against euro.
Less hawkish scenario. Minutes show significant division in the committee with several members pushing back against the hawkish dot plot projections. That would take some air out of dollar strength and give euro a small bounce.
Base case is neither. Minutes reflect a committee that held rates, leaned hawkish in the dot plot, and did not signal anything dramatically different from what the statement already showed. Euro dollar probably stays in its current range around $1.14 and waits for the next data point to move it.
EUR/USD Forecast After the Fed Minutes
Incoming economic data matters more than these minutes at this point. What happens to US jobs and inflation over the next several weeks will determine whether the October rate hike that is priced in actually happens.
If US data keeps coming in strong dollar stays supported and euro keeps drifting lower. If data softens like the June jobs report did the rate hike timeline pushes out and dollar gives back some ground.
Fresh US-Iran military exchanges this week add another layer. Oil prices moving back up toward $75 for Brent puts inflation risk back on the table. That is a dollar positive development if it feeds through to inflation expectations. Euro does not have the same inflation dynamics right now since Europe imports energy too but European economy is also softer which limits ECB’s ability to respond aggressively.
Wednesday’s minutes will get parsed carefully but unless Warsh’s team put something genuinely surprising in the notes the bigger moves in this pair are probably coming from data and geopolitics rather than from a meeting that happened three weeks ago.