US Dollar Eyes FOMC Minutes for Next Move. Where To for EUR/USD?

• US Dollar held ground in APAC trade, set to test key levels ahead of FOMC minutes

• Asia Pacific equity markets found some support despite a soft Wall Street lead

• RBNZ decision provided NZD volatility, market looking at EUR/USD support levels

The US Dollar held firm in Asia after strengthening in the North American trading session against the major currencies, even as Julys retail sales data showed a steeper downtick than expected. Traders may have interpreted the outsized 1.1 percent drop through the lens offered by recent University of Michigan consumer confidence data. It showed a loss of confidence in the face of steep inflation. That may have been seen as beckoning the central bank to act.

Nevertheless, Fed Chair Powell gave markets very little at a town hall meeting about policy adjustment and the S&P 500 finished the session slightly weaker. Despite this lead, Asian equities found some support, with Hong Kong‘s Hang Seng Index and Japan’s Nikkei 225 leading the way.

The New Zealand Dollar spiked down as the RBNZ unexpectedly held the cash rate at 0.25%, whereas analysts expected a 25bps rise to 0.50%. It later recovered to levels seen before the decision after RBNZ Governor Adrian Orr expressed optimism about the outlook for the New Zealand economy. While he acknowledged elevated health risks and some export sectors struggling, he was very positive on overall growth and employment prospects. He further re-iterated a reduction in stimulus must be done at some stage.

US housing starts are out today ahead of minutes from Julys FOMC meeting. Markets will be keen for any clues on tapering plans despite the time lag from the meeting itself. Powell referenced the impact of Covid at the town hall meeting and analysts will be looking closely at the wording around this risk.

If the US Dollar strengthens significantly against the Euro, it may bring on larger moves and create volatility in other currency pairs as well. For example, the Australian Dollar has also made a new low for the year against the Greenback and could still be susceptible to further bearish influence from moves in EUR/USD.

EUR/USD is trading very close to the year low of 1.1700 and a conclusive break below that level may see a test of the low at 1.1600 from last year. If it were to move below 1.1600, it may open a larger move lower in EUR/USD and mark an overall USD strengthening across the markets.

EUR/USD – Daily Chart