Fed Minutes to Guide USD as Greece Drags EUR Down

The Federal Reserve will publish the minutes from its Federal Open Market Committee (FOMC) meeting on July 8 at 2 p.m. EDT. The U.S. central bank has made clear it intends to raise the benchmark interest rates after a period of record low borrowing costs. Global macroeconomic headwinds and a domestic slowdown keep pushing back the potential date for the start of a tightening monetary policy cycle. The Fed will release details from its June meeting three weeks ago. Market conditions have declined as Greece and the Chinese stock market have caused investors much consternation.

Traders will review the comments from Fed policy members looking for insights, hints of a clear timeline, and the particular tone used in the notes, all of which will affect USD pricing. Voting members of the FOMC have been neutral on the economy but have dashed hints of optimism in previous releases. The “data dependency” that has been preached by the central bank has reintroduced volatility to markets as the focus has shifted dramatically to the economic indicators with no guidance from the Fed, until after it has been confirmed by the economy.

Central Bank Minutes Publishing Trend to Start Changing

The minutes from central bank meetings are published two to three weeks apart to avoid overloading the market with information. The downside of that strategy is that it worked fine when the world was not as connected as it is now. Global news travel fast and markets have improved their pricing speed so that in today’s world, it’s better to release information as soon as it is available to avoid the market reacting to an event with limited knowledge. To that end, the Bank of England is doing away with the two-week wait between announcing its rate decision and publishing the minutes from the Monetary Policy Committee’s meetings. The new immediate information schedule will start on August 15, and if successful, it will be the new benchmark for all central banks to follow.

The June FOMC meeting is significant for two reasons. Firstly, at one point the Fed was the main candidate for an expected interest rate hike before the horrendous first quarter data emerged. Secondly, it was followed by a press conference by Fed Chair Janet Yellen. Investors will be on the lookout to see if her responses line up with what the rest of the FOMC were thinking as they announced the rate would remain unchanged. The Fed managed to keep the market guessing about the timing of the rate hike. While September and beyond were mentioned there was no clear answer, and once again investors were asked to keep an eye on the data.

Fed Hawks Still See Two Rate Hikes

Fed Governor Jerome Powell was more hawkish in the week following the meeting. He not only favors a September rate hike, but he wouldn’t be surprised by a second rate increase before the end of the year. Markets don’t agree, and while there is a still probability of a single rate cut this year, it will be a surprise if the U.S. economic data is able to justify a hike even once let alone twice this year.

Fed Chair to Have Last Word on Friday

The global slowdown further complicates the Fed’s promised agenda or rate normalization. Greece has not had a huge economic impact on the eurozone, but its reputation is another story. The uncertainty the European Union finds itself in will not endear it to investors, which is one of the reasons the EUR is struggling. The European Central Bank will keep its quantitative easing program on track and that will favor USD strength, but in order for the dollar to capitalize on rate divergence, it must follow through on the U.S. central bank’s plans to raise rates.

Yellen will have a chance to comment on the economy as part of her speech on economic outlook in Cleveland on July 10.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza