FOMC Minutes Provide Insight as Dollar Weakens

Markets will closely scrutinise the Fed as diverging opinions emerge around when to cut rates, given the strong labour market and the impact of tariffs.

Timing of Cuts Takes Spotlight

Last week's surprisingly for this year, giving plenty of ammunition for the hawkish side. The headline number of 144K jobs created was well above the 110K forecast. However, it was still below the 159K average for the prior twelve months, supporting the argument that the labour market is losing momentum. Yet, the unexpected drop in the unemployment rate to 4.1% from 4.2% previously is likely more important for the Fed's outlook. It implies that the job market remains "tight" and could therefore continue to provide inflationary pressure.

Following the labour data, the odds of a , while the second rate cut for October was pushed forward to December. However, the hawkishness at the Fed has failed to support the dollar, which racked up a more than —the fastest depreciation of the greenback since the early 1970s. Investors are concerned that tariffs and general fiscal policy uncertainty will lead to the US economy underperforming and are selling dollar-denominated assets. The prospect of higher rates for longer in the US would likely hurt the dollar, as it would be perceived as contributing to a slowing economy.

Dissenting Views on the Outlook

Fed Chair Jerome Powell's wait-and-see approach is in the middle of a . The FOMC's minutes offer a unique opportunity to gain a better understanding of what the Committee's members prioritise when it comes to policy. The last meeting saw the publication of the "dot-plot" matrix, which included a prediction of two rate cuts for the rest of the year. Hawkish members continued to argue that the inflationary effects of tariffs have not yet been felt, while dovish members have expressed concern about the conditions of the labour market.

The combination of a more resilient labour market and than expected aligns with the hawks for now. The largest beneficiary of the dollar's weakness has been the EURUSD, which has appreciated by over 12% since the start of the year, as the EU has increased its deficit spending and the ECB has cut rates multiple times.

EURUSD Forms Double Bottom

Despite falling since the peak of 1.1830, EURUSD has formed a double bottom at 1.1683, as indicated by the ‘autotrend’ support. If bulls hold the line, breaking the 1.1744-1.1750 area could boost the pair towards the 1.1800 handle and eventually reclaim the top. However, the descending tilt of the short-term trend, shown by the lower peaks at 1.1790 and 1.1766, along with narrowing 25-period Bollinger Bands, suggests a potential bearish breakout. Supports below the possible formation sit at 1.1632 and the 1.1600 round level.

Source: SpreadEx | EURUSD

Key Takeaways

The Fed minutes will provide insights amid diverging opinions around the timing of rate cuts. Strong labour market data supports the hawkish stance, but concerns over tariffs and fiscal policy uncertainty have weakened the dollar. Hawks argue that the inflationary effects of tariffs have not been felt, while doves voice concern about labour market conditions, with the combination aligning with the hawks for now.