The minutes of the latest Fed meeting are due out at 18:00 GMT on Wednesday. Chairman Powell was less cautious than markets had anticipated back then, downplaying the prospect of rate cuts. The minutes could echo a similar message, particularly since this gathering took place before the latest escalation in trade tensions. If so, that may trigger a slight unwinding of market rate-cut bets, lifting the dollar.  

Fed Chairman Powell ‘calmed’ investors back at the May meeting, indicating that the recent shortfall in inflation is likely to be only transitory and that his central bank is comfortable keeping its policy unchanged indefinitely. He struck a firmly neutral tone, which was a long way off from the cautious bias traders expected, causing market bets for rate cuts to be pared back.

Trade war resumes

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That didn’t last, though. US-China trade tensions escalated just a few days later, which traders interpreted as raising the likelihood for the Fed to ease. Indeed, a prolonged trade war would likely take its toll on economic growth, and the central bank may try to cushion that impact by slashing rates. In this context, a quarter-point Fed rate cut by December has now been fully priced in, according to the Fed funds futures.

Yet, the upcoming minutes probably won’t reflect any heightened trade worries, given that the meeting took place before tensions intensified. Instead, they may echo Powell’s neutral tone, underscoring that the Fed is firmly on hold until – and if – something changes drastically enough to require action. Given how dovish market pricing is, a neutral bias could trigger a slight unwinding of rate-cut bets, lifting the dollar.

No alternative, for now

In the bigger picture, the outlook for the dollar remains bright even despite speculation for Fed cuts. There’s simply no viable alternative for now, with most other major currencies being unattractive. The euro is tormented by growth concerns, the pound by Brexit, while the aussie and the kiwi have been hit by trade uncertainty as well as rate cut expectations. The yen has shined amid risk aversion, but the ultra-low interest rates in Japan are keeping a lid on its appeal, too.

For the dollar to weaken, one of these gloomy narratives needs to change, with the most important being the European growth story. In that sense, the euro area PMIs that will be released on Thursday could play a pivotal role in deciding whether the dollar will remain ‘king’ of the FX market for a while longer, or whether the euro will start to regain its luster.

Technical picture

Further declines in euro/dollar could meet support near the 2-year low of 1.1110, with a downside break opening the door for a test of 1.1020.

On the flipside, a reversal higher may stall at the 50-day SMA, currently at 1.1239. If the bulls overcome that, attention would turn to the May 13 high of 1.1265.

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