US dollar firms on hawkish FOMC minutes

The US dollar strengthened on Wednesday, bolstered by some hawkish Federal Open Market Committee (FOMC) minutes.

Meanwhile, the pound is edging higher in early trade today, with GBP/EUR stable at €1.1995 and GBP/USD buoyed at $1.3095. GBP/CAD is ticking up to C$1.6440, while GBP/AUD and GBP/NZD rally to AU$1.7492 and NZ$1.8976, respectively.

Looking ahead, will some dovish minutes from the European Central Bank (ECB) weigh on the euro today?

What’s been happening?

The US dollar traded in a narrow range through most of yesterday’s European trading session, before firming in response to the latest FOMC minutes.

The hawkish tone of the minutes further bolstered expectations for the next Federal Reserve interest rate hike, with the odds of a 50bps hike in May rising to 79% according to CME’s FedWatch tool.

The euro, meanwhile, got off to a poor start on Wednesday, with the EUR/USD exchange rate briefly striking a one-month low after Germany reported a much larger-than-expected contraction in factory orders in February.

However, EUR exchange rates subsequently firmed through the European session amid a modest market correction.

At the same time, the pound traded without any strong directional bias as concerns over the rising cost of living in the UK were reignited by a rise in National Insurance which came into effect yesterday.

What’s coming up?

Turning to today’s session, we are likely to see the situation in Ukraine remain a key catalyst of currency movement.

This could see the euro struggle as doubts over the peace process persist as more evidence of atrocities committed by Russian troop galvanises Western support for Ukraine and the Eurozone economy is threatened by additional sanctions.

The publication of the minutes from the European Central Bank’s March policy meeting could also drag on the Euro if they highlight policymakers’ reluctance to begin raising interest rates.

GBP investors will look to a speech by Bank of England (BoE) policymaker Huw Pill for fresh impetus today, with the pound potentially stumbling if he should cast any doubt on a potential May rate hike.

Meanwhile, yesterday’s FOMC minutes may continue to extend support to the US dollar today, especially if the Fed policymakers scheduled to speak today strike a broadly hawkish tone.