​​Fed minutes review: caution and economic resilience bolster US dollar​

​​​Fed's cautious approach underpins dollar strength

​The recent release of the September Federal Open Market Committee (FOMC) minutes has revealed a Federal Reserve (Fed) that, while acknowledging the need for monetary policy recalibration, is in no rush to aggressively cut interest rates. This cautious stance has provided support for the US dollar, as investors recalibrate their expectations for future rate cuts.

​Despite delivering a substantial 50 basis point cut in September, the minutes showed a lack of unanimity among FOMC members. Some favoured a more modest 25bp reduction, indicating that future cuts will likely be subject to robust debate within the committee. This revelation has prompted markets to reassess their expectations, with the Fed's terminal rate for this easing cycle being repriced 50bp higher over recent weeks.

​Market reaction and widening yield differentials

​The immediate market reaction to the minutes was relatively muted, with short-dated US yields ticking up only slightly. However, the broader trend over the past few weeks has seen a significant movement in the dollar's favour. The EUR/USD two-year swap differentials have widened from 85bp to 130bp in about three weeks, explaining the recent pressure on the EUR/USD pair, which has drifted towards the 1.09 level.

​Upcoming factors that could influence dollar trajectory

​CPI data release: A potential game-changer

​All eyes are now on the impending release of September's Consumer Price Index (CPI) data. A core CPI reading of 0.3% month-on-month (MoM), slightly above consensus, could further bolster the dollar's position. Such a result, while not derailing expectations of a 25bp cut from the Fed in November, might limit the central bank's room for more aggressive easing.

​Fed speakers on the horizon

​Market participants will also be keenly listening to upcoming speeches from Fed officials Tom Barkin and John Williams, both considered modest hawks. Their comments could provide additional insight into the Fed's thinking and potentially influence dollar sentiment.

​Global context: balancing acts and uncertainties

​Chinese stimulus and commodity currencies

​The forex market remains choppy, influenced by stimulus measures from China and ongoing instability in the Middle East. Anticipation of significant new bond issuance by the Chinese Ministry of Finance is providing some support to commodity currencies, creating a counterbalance to dollar strength.

​US election looms large

​With the US presidential election now less than a month away and polls suggesting a tight race, uncertainty is creeping into the markets. This environment of political ambiguity typically favours the dollar, as investors seek safe-haven assets.

​EUR/USD outlook – technical analysis

​The pair continues to decline ahead of next week’s European Central Bank (ECB) meeting. A brief bounce earlier in the week was met by a wave of selling following the Fed minutes, which took the price to its lowest level since mid-August.

​While the EUR/USD uptrend is still in place, the pressure appears to be building as the fundamental gap between the ECB and Fed widens. The former is now on course to cut rates next week, and that has continued to put downward pressure on the pair. While a 25bps cut by the Fed is still viewed as highly likely, the chances of a hold are creeping up, boosting the US dollar.

​A recovery back above $1.0950 might help to establish a higher low and save the uptrend for the time being. However, the steep losses from $1.12 in mid-September means that there is a lot of work to be done to help restore a bullish view.

​Further declines would target the August lows down towards $1.08.

​EUR/USD chart

​Market expectations and dollar index targets

​Current market pricing suggests approximately 40 basis points of cuts for the remainder of the year, aligning closely with the Fed's projection of about 100bps total easing by year-end. This pricing equilibrium could potentially limit further dollar gains in the short term.

​However, if US core CPI surprises on the upside, we could see the dollar index (DXY) make a bid for the 103.35 area. Ongoing geopolitical uncertainties are likely to provide additional support for the greenback.

​Conclusion: dollar's glow likely to persist

​In conclusion, the combination of a cautious Fed, resilient US economic data, and global uncertainties paints a picture of continued dollar strength in the near term. While there's potential for some consolidation if market pricing settles around current levels, the overall outlook remains favourable for the US currency. Investors and traders alike will need to stay alert to upcoming economic releases and Fed communications, which have the potential to shift this landscape rapidly.