At the close of the American trading session on Wednesday, the minutes of the September meeting of the Federal Reserve (Fed) will be published. This release could potentially provoke increased volatility in the EUR/USD pair, but under certain conditions, if the market's expectations regarding the tone of this document do not align with reality.
In general, when speaking about the "Fed minutes," one can draw an allegory with stars in the night sky—in many cases, we see the light of celestial bodies that no longer exist. The American regulator evaluates the situation in the "here and now," whereas the two-week time interval—from the moment of the meeting to the publication of the document—partially diminishes the relevance of the minutes. Therefore, the EUR/USD pair does not always exhibit volatility in response to the publication of the "minutes."
It's worth noting that the outcomes of the September Fed meeting had a hawkish character. The market received two signals from the American regulator. The first signal indicated that the Fed might raise interest rates again before the end of the current year, and the second signaled that the central bank does not intend to lower rates in the foreseeable future. These messages supported the greenback, which strengthened its positions, including against the euro.
The updated "dot plot" was also on the side of the U.S. currency. The chart reflecting the individual expectations of committee members revealed their hawkish sentiment. It became known that 12 out of 19 Fed leaders expect another rate hike by the end of 2023, in other words, in November or December.
Fed Chair Jerome Powell also expressed hawkish messages, stating that the interest rate has not yet reached its peak value. According to him, most Fed members believe that another rate hike is appropriate by the end of 2023.
In response to the outcomes of the September Fed meeting, the EUR/USD pair dropped nearly 200 points over several days, testing the 4th figure. However, the core PCE index was then published, which decreased to 3.9%. Subsequently, the Non-Farm Payrolls data showed a slowdown in the growth rate of average wages in the U.S. (4.2%). The chances of an interest rate hike at the November meeting began to dwindle rapidly—within a few weeks, the 50% probability dropped to the current 12% (according to CME FedWatch Tool data).
Furthermore, some Fed members who had recently advocated for additional tightening began to call for caution regarding hawkish decisions. This includes former Dallas Fed President Robert Kaplan, who recently stated that there is "less urgency" for a rate hike at the November meeting. Cautious comments were also made by San Francisco Fed President Mary Daly and Fed Vice Chair Philip Jefferson.
What does all of the above imply in the context of today's release? First and foremost, it suggests that the market had already priced in the hawkish notes of the September meeting back in September, positioning itself around the 4th figure. Then, the euphoria faded as the core PCE index, Non-Farm Payrolls, and comments from some Fed members brought the EUR/USD sellers back to earth. Therefore, the protocol of the September meeting, no matter how hawkish it may be, is unlikely to help the dollar regain its previous positions. At the same time, the "minutes" could potentially intensify market doubts about the Fed's hawkish stance.
In reality, the Federal Reserve did not announce a rate hike; it merely allowed for the possibility, tying its moves to the dynamics of inflation. As Fed Chair Powell noted in the final press conference, the Fed's future decisions "will be based on the aggregate of all data." This means that the upcoming inflation releases (Consumer Price Index, core PCE index, Producer Price Index) for September and October will be crucial in the context of the November meeting.
Thus, the minutes of the September Fed meeting is unlikely to provide support for the U.S. dollar. The market will either ignore this release or interpret it against the greenback if the document is not "hawkish enough."
Note that the said minutes will be published today, just ahead of the key inflation report for this week. On Thursday, October 12, the U.S. will release data on the growth of the Consumer Price Index for September. According to forecasts, both the overall and core CPI will show a downward trend. Clearly, on the eve of such a significant publication, EUR/USD traders will exercise caution in making trading decisions. The "dated" Fed minutes may complement the information landscape for the day, but it won't be the determining fundamental factor. It is advisable to maintain a cautious position on the EUR/USD pair until the Consumer Price Index is published.
