Foreign exchange trading reminder: the minutes strengthen the Federal Reserve's interest rate hike expectations, the dollar is boosted, and the euro may not rise by 1% in the next six months.

In early Asian trading on July 6, Beijing time, the U.S. dollar index fluctuated narrowly, and is currently trading around 103.34. The dollar rose against other major currencies on Wednesday after the minutes of the Federal Reserve's June policy meeting strengthened market expectations for another rate hike at the end of July. Last month, almost all Federal Reserve policymakers agreed to keep interest rates unchanged, and most expected that further tightening would eventually be required, a view that drove U.S. Treasury yields higher, adding to the dollar's gains. The dollar index finally closed up 0.25% at 103.36 on Wednesday.

According to CME's FedWatch tool, the federal funds rate futures market expects the probability of a 25 basis point rate hike by the end of the two-day policy meeting on July 26 to rise to 88.7%.

Jeffrey Roach, chief economist at LPL Financial, said the Fed was likely to raise rates in July, if nothing unexpected, after a hawkish pause in June. He said Friday's jobs report would be carefully analysed for any signs that the labour market was weakening. "A very interesting statement in the minutes suggests that job growth may actually be weaker than the jobs report suggests," he said in a note.

The Labor Department report is expected to show the U.S. economy added 225,000 jobs in June and the unemployment rate fell to 3.6 percent, according to market research.

Joe Manimbo, senior market analyst at Convera, said: "The economy in general looks resilient but manufacturing has been in this slump for eight straight months and we have to see if that pushes the Fed to signal that the end of the tightening cycle is not far off."

The dollar rose to a high of 144.73 against the yen on Wednesday, but was still below the 145 level that prompted the Japanese authorities to intervene last autumn. It ended the day up 0.15% at 144.64. The pair briefly rose to a high of 145.06 last week for the first time since November.

The dollar moved roughly in line with the 10-year Treasury yield, which rose to 3.9375 per cent after the release of the Fed minutes.

Shusuke Yamada, chief currency and rates strategist at Bank of America in Tokyo, said the market was looking at the latent risk of intervention but was looking for the possibility of further yen weakness in the medium term. He added: "We don't think it's very likely that the Ministry of Finance will intervene at the same level as last year - if the decline is not fast, below 150 we may not see intervention at all."

The euro closed down 0.22 per cent at 1.0853 against the dollar on Wednesday as the euro continued to come under pressure due to the gloomy outlook for the eurozone economy.

Geopolitical conflicts persist, inflation expectations are high, the interest rate hike cycle is still not over and the depressing impact on the economy is deepening. Optimism about the eurozone economy faded at the start of the year as more and more economic data than expected were released, and a growing number of economists warned that sluggish growth could continue for years.

Societe Generale FX derivatives strategist Olivier Korber said in a note that the low level of implied volatility of the euro against the dollar looks like a sign of (market) complacency given the economic instability in the euro zone. The implied volatility of the euro against the dollar has fallen to the level of actual volatility, which appears to reflect market complacency as the euro zone has recently faced a series of negative economic surprises and entered a technical recession. With the impact of a sharp rise in interest rates, implied volatility may now rise. The strategist said that the mechanical tightening of monetary policy has come at the expense of future growth. According to Refinitiv data, the implied volatility of the euro against the dollar for the three-month period is about 6.425%, down from 8.6% at the beginning of the year.

According to market research, the euro is expected to rise by less than 1% against the dollar in six months, reaching 1.10 (from 1.11 in the June survey).

After three sessions of gains, sterling edged down 0.06 per cent to 1.2703 against the dollar on Wednesday. The UK was the only G7 country where inflation was still rising, according to the Organisation for Economic Co-operation and Development. That helped support expectations of a rise in interest rates from the Bank of England, limiting the pound's fall against the dollar.

The Paris-based organization said Tuesday that year-on-year inflation at the G7 fell to 4.6 percent in May from 5.4 percent in April, the lowest level since September 2021.

Most advanced economies showed a downward trend in May, with annualised inflation falling in the US, Canada, France, Germany, Italy and Japan. But the UK was found to be an exception. The UK's CPI for all items rose to 7.9 per cent year-on-year in May, up slightly from 7.8 per cent in April, the group said.

JPMorgan said the Bank of England might have to push interest rates up to 7 per cent, triggering a "hard landing" for the economy to tame inflation.

Allan Monks, an economist at JPMorgan Chase, said some indicators suggest that the Bank of England's key interest rate will have to rise by a further 2 percentage points from its current 5% to control inflation, at a time when the risk of a recession is rising.

Thursday's key data and events

Institutional Perspectives Summary

1. Mitsubishi UFJ: Falling inflation trends in the UK could weaken the pound;

In a note, Derek Halpenny, an analyst at Mitsubishi UFJ, said that short-term inflation expectations in the UK should soon decline, and that the pound will weaken as expectations for the Bank of England interest rate are lowered. He said recent CPI data showed that food inflation has peaked, UK supermarkets have announced plans to cut prices, and utility bills should fall from July. This should mean "a more meaningful decline in inflation in the coming months and will lead the market to doubt the extent to which the Bank of England will need to raise interest rates in the future." The agency expects the Bank of England to raise interest rates two more times, compared with the current market expectation of five, which will remove some of the current support for sterling yields;

2. Rabobank: If this month's data supports the Federal Reserve to raise interest rates after July, the dollar is expected to rise.

Jane Foley, senior currency analyst at Rabobank, said in a note that if US economic data this week - including Thursday's ADP jobs data and ISM services data, as well as Friday's non-farm payrolls data - is strong, the dollar could rise as markets begin to expect the Federal Reserve to continue raising interest rates beyond July. She said the stronger-than-expected data could boost the Fed's prospects for another rate hike after July and support the dollar in the near term. For now, the market "remains reluctant to digest expectations of further rate hikes after July". However, any rise in the dollar is likely to be short-lived as "the US economy is likely to slow before the end of the year";

3. Bank of America: Moving towards 150 in the face of rising volatility, possible foreign exchange intervention.

Adarsh Sinha, head of Asia-Pacific FX strategy at Bank of America Global Research, said: "In the past week, Japanese government officials have stepped up their rhetoric against yen depreciation. If the dollar goes above 145 against the yen and moves towards 150 in the face of rising volatility, FX intervention could occur;"

4. Analysts: If the US data strengthens, it may cause the euro to fall below 1.08 against the dollar.

Market analyst James Skinner said that the euro entered a new week near a two-month high against the dollar, but quickly lost momentum. If U.S. economic data leads to another strengthening of the dollar and weakening of Asia-Pacific currencies, the euro could fall further to 1.08 or below.