Fed Minutes Preview: USD Could Rise If Minutes Show Mounting Concerns Over Inflation

The Federal Reserve (Fed) will release the minutes of its June monetary policy meeting at 2 pm ET on Thursday.

The policymakers raised rates by 25 basis points in June, kept the neutral rate unchanged at 2.9 percent, and revised higher the dot plot to signal four rate hikes in 2018. This was a hawkish development for sure, but it was a close call as only one policymaker upgraded their rate projection to signal four rate hikes in 2018, which ended up pushing the median forecast higher.

Hence, the market isn't buying the Fed's call for four rate hikes and has only priced-in a 25 bps hike in September.  

Further, speculation is on the rise that continued flattening of the yield curve will force the Fed to pause policy tightening. As of this writing, the curve is the flattest it's been since August 2007.  

Meanwhile, a significant majority of the International Monetary Fund (IMF), fear the inflation breakout will force the Fed to hike rates at a faster rate. Note that the Fed's preferred gauge of inflation - the core personal consumption expenditure (PCE) - topped its 2 percent goal to hit a six-year high in May.

So, investors will watch out for:

• Clues on what would it take for other policymakers to revise their projection from three rate hikes to four rate hikes.
• Evidence of whether Trump's trade antics are interfering with the Fed's plans to hike rates at a faster pace.
• Fed's take on the relentless flattening of the yield curve.
• Clues on whether policymakers have some tolerance for above-target inflation and if there is a consensus building in favor of a higher neutral rate.

The Fed is trapped between the relentless flattening of the yield curve and rising inflation amid the threat of US-China trade war.

The US dollar will likely pick up a strong bid if the minutes show the officials are more concerned about rising inflation and are less worried about a flattening yield curve and US-China trade standoff. Moreover, in this scenario, the probability of four rate hikes in 2018 could hit a new high. Also, markets may start pricing an upward revision of the neutral rate (USD bullish).

On the other hand, the USD could take a beating if the minutes show growing tolerance for above-target inflation and mounting concerns over trade standoff

Dollar Index Technicals

Technically speaking, the greenback looks exhausted, having rallied more than 8 percent in the last five months.

The previous two weekly candles and the current weekly candle have a long upper shadow, which is a sign the bulls are likely running dry. However, it is still too early to call a stronger pullback. Moreover, last week's doji candle made Friday's NY close pivotal.  

A bearish reversal would be confirmed if DXY closes below $94.17 (previous week's doji candle low) on Friday. In this case, the greenback will likely revisit levels below $93.00.

Meanwhile, bulls would breathe a sigh of relief if the DXY closes above $95.53 (previous week's doji candle high), although a sustained break above $96.04 (50% Fib R of 103.82-88.25) is seen happening only if the Fed minutes sound hawkish and US and China reach some deal on trade issues.