US Dollar: Range-bound trading as FOMC minutes loom – ING

ING’s Chris Turner highlights that the US Dollar remains supported by higher energy prices and longer-term US yields, but there is still low FX volatility, favoring carry trades. He anticipates that the July FOMC minutes will reveal a less hawkish Federal Reserve than previously indicated by the Dot Plots, with upcoming CPI, jobs data, and Jackson Hole events playing a more significant role.

ING’s base case is no September hike and a slightly softer Dollar, with the DXY concentrated in a tight range and USD/JPY options pricing minimal movement. The ongoing conflict in the Middle East is driving up energy prices and contributing to the rise in long-end yields. Longer-dated US Treasuries saw a slight uptick in demand above 5.30% yesterday, but risks still lean towards the upside.

Higher rates have slightly reduced growth stocks' momentum, yet a 5% decline in the Philadelphia Semiconductor index yesterday is negligible compared to the daily fluctuations seen this year. Currently, there is no indication of a fundamental shift in the low volatility environment, which favors the carry trade.

The primary focus today will be on the release of the FOMC minutes from the July meeting. Previously, the vote was 9-3 in favor of maintaining rates unchanged, leading to a dovish session for the short end of the US curve and the dollar. However, the long end sold off. It is believed that the 12-member FOMC may be less hawkish than the projections reflected in the June Dot Plots.

While there might be a few hawkish references in tonight’s minutes that could marginally strengthen the dollar and short-dated rates, the minutes are not expected to be a game-changer. Instead, further CPI and jobs data, along with the end-of-month Jackson Hole symposium, will have a more substantial impact on whether the Federal Reserve hikes in September.

ING's base case is that it won't, and the dollar will weaken slightly. Hence, expect more narrow range trading in DXY, possibly within a 99.40-99.80 range. One-day FX option straddles in USD/JPY are priced at just a 28 USD pip range for the next 24 hours.