FXDaily: Mind Your Minutes

Minutes from the last FOMC meeting will be in focus later today amid growing expectations that the Fed could change its inflation strategy in September. The biggest risk over the next 24 hours is probably stretched short dollar positioning but we doubt that short, sharp dollar rallies are sustainable.

USD: With real yields a hot topic, tonight’s FOMC minutes will be key

US inflation expectations derived through the 5Y5Y inflation swap touched 2% yesterday – a new high in this recovery cycle. This is feeding into the current conviction view that: a) a recovery is underway (helped potentially now by the Democrats softening their position on the next round of stimulus) and b) the Federal Reserve will not touch the monetary brakes for several years. The driving narrative of negative US real yields devaluing the dollar and reflating financial assets will be challenged tonight when the minutes of the July 29 FOMC are released. These are in focus since expectations are growing that the Fed will shift its monetary policy strategy at the September 16 meeting – potentially adopting Average Inflation Targeting (AIT). Any clues from the July minutes as to its likelihood and any insights on what it would take for the Fed to initiate Yield Curve Control could see dollar losses extend. The biggest risk over the next 24 hours is probably stretched short dollar positioning. A short-term correction cannot be ruled out if the switch to AIT is more an ‘evolution than a revolution’. However, we doubt any short, sharp dollar rallies are sustainable and that the dollar should stay pressured into a very contentious Presidential election in November. Expect DXY to stay soft into the minutes, DXY pressing 92.00. (UDN, UUP)

EUR: Onwards and upwards

EUR/USD has come pretty close to 1.20 and there seems little on the European calendar to dent the euro today. A similar EUR/USD rally in summer 2017 (albeit led by the euro then) saw EUR/USD trigger stops above 1.20 and trade to 1.2070/90 before a bigger correction ensued. That would seem the risk currently. Today also look out for the 3Q Norges Bank expectations survey ahead of tomorrow’s Norges Bank meeting. Any surprise optimism could see EUR/NOK press the 10.43/46 area. (FXE)

GBP: Cable joins the weak dollar party

Widespread dollar weakness helped cable through resistance at 1.3200/3210 yesterday and a further rally looks possible given that speculators were still net short in the latest CFTC survey. Above 1.3285 cable could even advance on 1.35. (FXB)

PLN: Zloty starts to outperform

Enjoying the higher EUR/USD, EUR/PLN has started to nudge lower making the Polish zloty the strongest emerging markets currency over the last five days. Remarks earlier in the week from the MPC’s Kamil Zubelewicz may have helped, where he threw his weight against calls for a weaker PLN. EUR/PLN is nudging down to key support at 4.3680/3700, but we suspect core central bank members may have something to say if the zloty gets too strong, including the threat of increasing the quantitative easing programme or even negative rates. For the time being, however, EUR/PLN will press 4.37.