Financial markets offered a muted response towards June’s hawkish FOMC meeting minutes, with the Dollar rally easing as investors re-evaluated the mixed messages that policy makers dished out. It was interesting how the minutes illustrated a visible divide between officials over the timings of the balance sheet reduction, with an increasing split on the outlook for inflation compounding to the confusion. While Fed hawks felt that the economy could handle higher interest rates and that this period of low inflation in the States was ‘transitory’, doves expressed concerns over the recent softness in inflation continuing. There were also discussions over the uncertainty regarding the possible implementation and changes to fiscal and other government policies.
All in all, Dollar bullish investors who were seeking some form of inspiration and further clarity from June’s FOMC meeting minutes, were left empty handed and this was reflected in price action. Will the Federal Reserve have the ability to reduce their balance sheet and increase interest rates this year? Time will tell as such may depend on whether economic data from the States stabilizes, with this period of softness proving to be ’transitory’.
Speaking of economic data, investors may direct their attention to the influx of releases from the States today, which could support or deflate rate hike expectations. The ADP Non-Farm payroll will be the first course, followed by unemployment claims and topped up with the ISM Non-Manufacturing PMI report. In this period, where markets need more conviction over the Federal Reserve moving forward, with raising US interest rates and unwinding its balance sheet, economic data is likely to be closely scrutinized.
From a technical standpoint, the Dollar Index remains under pressure on the daily charts. A breakdown below 96.00 may encourage a further depreciation lower towards 95.50.
ECB meeting minutes in focus
The main risk event for the Euro during Thursday’s trading session, will be the release of June’s ECB meeting minutes which investors may deeply analyze for any discussions of a possible QE exit strategy. Although the Euro could find itself pressured if the minutes strike a dovish tone and emphasize the tepid inflation levels, the downside could be limited as markets digest this as old news.
It should be kept in mind that there has been a multitude of comments from various ECB members since June’s meeting, with the recent upbeat remarks on the Eurozone economy from Draghi last week supporting the Euro. The EURUSD remains bullish on the daily charts as there have been consistently higher highs and higher lows. The formation of a new higher low above 1.1300 may open a path back towards 1.1450.
Gold in a tight spot
Gold prices appreciated during Wednesday’s trading session, after June’s hawkish FOMC meeting minutes failed to support the Greenback and even created a sense of confusion. The mixed thoughts on inflation and the divide over the timings of the balance sheet reductions raised questions on the central bank’s ability to move forward with actually raising rates. Heightening tensions surrounding North Korea have also supported the flight to safety, with Gold trading around $1225 at the time of writing. While uncertainty in the longer term has the ability to ensure the yellow metal remains buoyant, bulls are fighting against the tide in the short term. Gold remains vulnerable to further downside as long as prices remain below $1240. Weakness below $1220 may open a path towards $1214.
Commodity spotlight – WTI Crude
WTI Crude edged higher during early trading on Thursday, after API data showed an unexpected decline in US crude inventories which encouraged investors to profit-take. With the unyielding oversupply dynamics weighing heavily on the minds of investors and it becoming clearer that OPEC no longer has the overwhelming say over the industry, oversupply will continue to be the name of the game when it comes to oil. This also means that the valiant efforts being made by OPEC to regain market share, are at threat of being offset from producers outside of their agreement pact. Investors may direct their attention towards the pending weekly oil inventory report from the EIA, which could pressure WTI further if there is a build.