DXY: what will the minutes from the July Fed meeting indicate?

 
 
 
 
 
 
 

The strengthening of the dollar and the growth of the DXY index resumed from the opening of the trading day. Thus, at the time of publication of this article, futures for the DXY dollar index are traded near 106.69, 26 points above the closing price of yesterday's trading day.

DXY

As you know, the dollar fell following the results of the past week. The reason for this was the weaker consumer price index CPI, published last Wednesday.

As follows from the report of the US Bureau of Labor Statistics, the annual producer price index (PPI) in the US in July fell more than expected, to 9.8% from 11.3% in June, which was also below market expectations of 10.4%. The annual core PPI also fell to 7.6% in July from 8.2% a month earlier.

Weaker inflation data significantly dampened expectations for a larger Fed rate hike, putting pressure on the dollar.

Now, the likelihood of a 75bp Fed rate hike fell to 35% in September from 80% (before the publication of the CPI index), according to the CME Group, which also affected the yield of US Treasury bonds, causing it to sharply decline.

Based on the weekly data on the number of applications for unemployment benefits published on Thursday, which also turned out to be weaker, the DXY dollar index made a new attempt to break through the local support level of 104.50, dropping to 104.52.

However, Fed officials were quick to reassure market participants, saying it was too early to announce "victory over inflation" that remains "unacceptably" high.

In particular, Minneapolis Fed President Neil Kashkari said he "does not see anything that would change" the need for the Fed to raise the discount rate to 3.9% by the end of the year and to 4.4% by the end of 2023.

According to Fed Chairman Powell, the US labor market and economy remain strong and are able to withstand the high pace of the monetary tightening cycle. As you know, this year the Fed has already raised interest rates 4 times, first by 0.25% in March, and then by 0.50% and 0.75% in June and July. Usually, the Fed prefers to move in smaller steps, changing interest rates at its meetings by 0.25%.

The next Fed meeting will take place on September 20-21. Even if the Fed once again raises the interest rate by 0.25% or 0.50%, it will still confirm the firm intention of the Fed's leadership to overcome high inflation in the US, which remains at 40-year highs.

At a press conference following a July meeting that raised the rate by 0.75%, Fed chief Jerome Powell said a "moderately tight monetary policy" was justified by current economic indicators, including high inflation, also saying that another sharp rate hike in September.

Now market participants will carefully study the minutes from this Fed meeting in order to more accurately assess the likelihood of such an increase in September and the further intentions of the leadership of the US central bank. The publication of these protocols is scheduled for tomorrow at 18:00 (GMT).

DXY has broken through the resistance level 106.00. Now, the breakdown of the next "round" level 107.00 will confirm the revival of the upward dynamics of DXY, sending it, for starters, towards the recent local maximum 109.14.