Dollar slips after Fed minutes; Geopolitics keep markets on edge

Fed minutes fail to add to market’s hawkishness

The US dollar pulled back against most of its major peers yesterday, extending gains only against the yen. Today, the greenback remains on the back foot, losing the most ground against the kiwi, perhaps due to the RBNZ’s hawkish hike.

Renewed tensions in the Middle East bolstered the US dollar at the beginning of the week, as the rebound in oil prices revived inflation concerns and thereby prompted investors to steepen their implied rate path again.

Yesterday’s pullback may have been a liquidation move before the next leg up, or a reaction to the Fed minutes, which failed to add to the hawkishness the meeting itself offered. The minutes revealed that a few participants wanted interest rates to rise now, while most of them agreed to a range of scenarios, one of which saw inflation returning to 2% on its own, and another where higher rates would be needed.

The minutes were not dovish as some market chatter suggested, they just were not hawkish enough to encourage more Fed hike bets. After all, according to the Fed funds futures, there is still a strong 80% chance of a 25bps rate hike by September, while another one is nearly fully priced in for March 2027. There is also a 30% chance that a rate hike could be delivered even later this month.

That probability could edge higher if indeed Iran proceeds with another closure of the Strait of Hormuz, as oil prices are likely to spike higher again. This could still be the case even if next week’s US CPI data for June reveal a slowdown amid the fall in energy prices during the month.

Yen fully reverses last week’s gains

The yen was the sole loser against the greenback yesterday, with dollar/yen fully reversing the sharp slide observed on July 2. Although the yen is recovering modestly today, traders may be willing to sell it even as Japanese authorities stated that they could very well intervene in the FX market without warning. Perhaps investors do not expect the BoJ to become hawkish enough to change the yen’s fate meaningfully.

Another quarter-point increase is nearly fully penciled in by the end of the year, but Prime Minister Takaichi’s calls for rates to stay low to help boost growth looms over the BoJ’s strategy. Takaichi cannot directly intervene in the BoJ’s plans but deciding whom to appoint to the Board could make a big difference. One of her appointees voted against the June rate hike, while another one, who joined the Board more recently, is also seen favoring looser policy moving forward. What’s more, the term of two hawks will end next summer, allowing Takaichi to appoint more doves within the Board.

Wall Street cautious ahead of earnings season, gold bounces slightly

On Wall Street, the Nasdaq recovered a little ground, but the S&P 500 and the Dow Jones closed another session in the red, with the latter losing more than 1%. That said, stock futures are pointing to a higher open today, despite the dim state in the Middle East.

With investors remaining concerned about further escalation in the Middle East and rising expectations about Fed rate hikes limiting valuation expansion for growth stocks, stock prices could resume their declines if indeed the Strait of Hormuz closes again, especially if the earnings season starting today does not produce encouraging results.

Gold found support slightly above the $4,000 mark and rebounded somewhat. That said, more US-Iran tensions and more Fed hike bets could invite the bears back to the game. A decisive dip below $4,000 could increase the chances of a breach below the November lows at around $3,915, thereby paving the way towards the low of September 25 at $3,715.