The minutes of the July FOMC meeting are due today and given the recent message of the Fed that positive incoming economic data won't sway the central bank from its tightening plans, the minutes of the meeting will likely be another opportunity to reinforce that message. That is why the hawkish surprise in today's communication is the most likely outcome. The Federal funds rate futures price in a rate cut next year from a peak of 3.6% to 3.2%, so clearly there is room for a hawkish adjustment in rate expectations, that may support the dollar and push equities lower.

The dollar rally resumed ahead of the release; the greenback index (DXY) is poised to retest the 107 level. Demand for long-dated US bonds in relation to bonds of shorter maturity continues to break records; the yield curve inversion reached its most extreme state since August 2000:

Such a shift in the structure of the US market interest rates is usually accompanied by a strengthening dollar. In addition, this is a bearish factor for commodity currencies. The weakening of AUD and NZD on Wednesday against the dollar exceeded 1%, the sell-off was also fueled by worsening growth forecasts of the Chinese economy, one of the key trading partners for Australia and New Zealand.

The euro trade-weighted exchange rate fell to the lowest level of this year. The gas crisis and its consequences for the economy continues to be the main bearish factor for the European currency. Pessimism is also felt in economic reports. The ZEW sentiment index for the German economy fell to -55.3 points, the lowest level in 12 years:

A recession in Germany in the second half of 2022 looks inevitable and it is reasonable to assume that there are few prospects for recovery in the EURUSD. After a month of consolidation, support at 1.01 is likely to break and we will see a move towards parity in the near future.

Inflation in the UK exceeded 10% on an annualized basis, hitting a 40-year high, according to the report released today. Markets price in more policy tightening from the Bank of England, interest rate derivatives expect the rate at 3.4% in March 2023 against 2.72% at the end of July. A larger room for maneuver for the BoE compared to the ECB is likely to drive the EURGBP further down towards support at 0.8350. At the same time, the lesser vulnerability of the US economy to deficit in the natural gas market suggests that investors will continue to prefer the dollar over the pound sterling. The GBPUSD is also likely to test the strength of the key support level of 1.20 soon.