FOMC Minutes Preview and EURUSD

Fed officials hinting at a pause in rates later in the year and ECB President Lagarde commiting to higher rates have the backdrop for today’s Fed minutes release.

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The latest price drivers

The release of the FOMC minutes later today is likely to get an extra look after comments from Fed officials over the last couple of days suggesting the possibility of a pause in rate hikes. Atlanta Fed President Raphael Bostic isn't a voter, but it's not uncommon for the Fed to hint at policy through non-voters.

There is a pretty strong consensus that the Fed will hike by 50 basis points in June. That is likely priced in. But there is a growing minority of analysts who are looking for potentially a 75-basis point hike. The next meeting is three weeks away.

What to focus on

What traders are likely to focus on is how much demand destruction FOMC members are willing to put up with to get inflation down. After the slight drawback in inflation in April, there’s a greater chance rate hikes later in the year do not materialize, hence the pullback in the USD over the past week or so.

Meanwhile across the pond, the EBC's Christine Lagarde issued a blog post ahead of Davos, saying that rates would likely return to positive territory by the end of the third quarter. That effectively means three rate hikes over the next four months. This is a bit more aggressive than the market was initially expecting, seeing three hikes by the end of the year. Hence, the strength in the euro.

The combination of these factors shows that there is a potential for the expected gap in interest rates to not be as wide as initially thought, which could provide further support for EUR/USD. At least until the next meetings of the ECB and Fed, where the market will find out if they deliver on expectations.

EUR/USD tags 50-day average

Euro bulls have taken on the $1.064 swing and attempt the 50-day average near $1.07. A close above the SMA will increase the chances of revisiting $1.08. There, trendline resistance awaits. Above it, a major zone can be observed near $1.1185, and it would be a chance for the Euro/dollar to reverse.

The bullish stochastic divergence is not so powerful to trigger a full trend reversal, but a bigger bounce to $1.08 seems quite plausible. If bulls fail to get past the 50-day MA, things could turn bearish again fast, with the support down at $1.047.

Source: Spreadex trading platform

Key takeaways

The FOMC is expected to implement a 50-basis point rate hike at the next meeting, but there is some possibility of a pause later in the year. Both Fed and ECB are going to raise rates throughout the year, so traders are waiting to hear whether FOMC members sound hawkish enough in the minutes to counter Lagarde’s hawkish comments.