Hawkish FOMC Minutes Should Spark EUR/USD, USD/CAD at Crossroads

By DailyFx | Updated July 30, 2014 AAA

DailyFX.com -

Talking Points:

- USDOLLAR holding trend break, USDJPY least cooperative.

- EURUSD and USDCAD offer better opportunities today.

- July forex seasonals in QE era still working against greenback, however.

Better than expected June US labor data may have set the pre-conditions necessary for a US Dollar rally, but it could be today's June 17-18 meeting FOMC minutes that prove to be the catalyst needed to shake the greenback out of its low volatility lull.

We expect the FOMC Minutes to take on a more hawkish tone than what Fed Chair Janet Yellen conveyed at her June press conference, insofar as the aggregate staff economic projections (SEP) suggest higher rates over the next two years, more so than the market is currently pricing in. Long-end US yields have stayed pinned lower, in no small thanks to Fed Chair Yellen's dismissal of recent inflationary pressures, calling them 'noisy.'

Indeed, if the FOMC minutes reveal more optimism regarding the US economy from its members, the US Dollar could see a kick higher as interest rates have some 'catching up' to do. Whereas the Fed staff projects the main rate at 1.13% at the end of 2015 and 2.50% at the end of 2016, the market is currently pricing in rates at 0.74% at the end of 2015 and 1.75% at the end of 2016 (data provided by Barclays).

Between these two areas of potential conflict - the market having mispriced when interest rate hikes are due and heightened concern among FOMC members about the inflation outlook, despite Fed Chair Yellen's soft tone - there is enough fuel to light a move under the US Dollar today.

See the video for technical setups in EURUSD, USDCAD, and USDJPY. Of the three, USDJPY looks the 'worst,' as it represents the most viable bearish option should the FOMC minutes disappoint with a dovish tone. Although it's not usually on the radar, USDCAD is at critical long-term support that may be carving out a short-term bottom.

Read more: Short-term Reversals Develop in GBP-crosses - Sell Highs or Buy Dips?

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