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23 May 2024 | FXGT.com

Cautious Fed Minutes Pressure EUR/USD, Focus Shifts to PMI Data

EUR/USD Falls After FOMC Minutes: The EUR/USD was knocked lower on Wednesday after the Federal Reserve’s (Fed) latest Meeting Minutes revealed a cautious stance from the Federal Open Market Committee (FOMC). The committee remains determined to wait for more proof that inflation will ease to 2%, sending risk appetite lower as investors hoping for dovish signs were disappointed.

Rate Cut Odds Reassessed: The FOMC’s Meeting Minutes did not directly rule out a September rate cut, but investors are increasingly nervous that the Fed may not find enough confirming data that inflation is making definitive progress towards the Fed’s 2% annual target. Following the meeting, the odds of a September quarter-point rate cut have eased to 60%.

Fed Inflation Concerns: Minutes from the Federal Reserve’s May policy meeting revealed concerns among participants regarding the slow progress towards the inflation target. The disinflation process is expected to take longer than previously anticipated.

Fed Policy Stance: Participants discussed maintaining the current restrictive policy stance longer if inflation does not move sustainably towards 2%. They also considered the possibility of reducing policy restraint if there is an unexpected weakening in labour market conditions. Various participants expressed a willingness to even tighten policy further if inflation risks materialize in a way that necessitates such action.

European Trading Focus: The primary focus for European trading today is the release of PMI data. Both the euro area and UK economies showed modest improvements in Q1, which continued into April. This economic activity provides the European Central Bank (ECB) and Bank of England (BOE) some leeway, reducing immediate pressure to cut rates.

Market Outlook: Today’s PMI data will be crucial in assessing the economic health of the euro area and the UK. Stable or improved PMI figures will likely support the current economic outlook and policy stance of the ECB and BOE. However, any setbacks, particularly in the UK data, could complicate the BOE’s decision-making process.

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