The USD dollar continued to weaken overnight as FOMC minutes brought some uncertainties on the FED’s rate hike path. While the central bank still expects to raise rates soon, worries about inflation could mean that the path won’t be as hawkish as it was earlier expected.
FOMC participants generally judged that it would be prudent to await more evidence that weaker economic data was “transitory” before further removing accommodation. U.S. Treasuries rose after the release of the minutes while the greenback tumbled. Fed funds futures continued to price around 100% probability of a hike in June, but a slide in long term yields could have been observed.
The market continues to see a rate hike in June as a done deal. source: Bloomberg
A slide in yields was a negative information for the US dollar. The currency lost about 50 pips to the Japanese Yen and a similar amount to the European currency. EURUSD is now traded at 1.1240, close to this week’s highs of about 1.1265, the highest since November.
US 10 year yield fell by 5 bps in the aftermath of the FOMC minutes. That pushed the USDJPY lower. The pair is now close to its fair value as indicated by the interest rate market. source: Bloomberg
After all the FED”s document doesn’t change the rate hike outlook, but could signal that the FOMC is worried about inflation. Weaker data could lead to a pause in rate hikes and that’s something that the USD doesn’t like. The next important report from the US is due tomorrow. Durable goods orders will show whether a rebound in economic growth in the second quarter is likely, but the biggest focus will be on inflation and NFP prints.
EURUSD rebounded after FOMC minutes. The pair approaches this week’s highs and a break above could lead to a test of 1.13.