FOMC Minutes Preview: “Wait-and-See” mode stays in place

The release of minutes from the Federal Open Market Committee's (FOMC) May meeting later today is drawing investor focus, albeit somewhat overshadowed by the eagerly anticipated quarterly earnings report from Nvidia. Nonetheless, market participants will be scrutinising the details for further guidance on the future path of US monetary policy. The Federal Reserve held interest rates steady at its May gathering, underscoring heightened economic uncertainty, stemming largely from US trade policy and mounting risks to both inflation and employment.

Key points markets will be watching for:

• The minutes are expected to reveal a widespread agreement among Fed officials on maintaining their "wait-and-see" strategy – a cautious stance, with future decisions contingent on incoming macroeconomic data.

• Details concerning updated inflation and unemployment projections for 2025, which may have been revised higher, and discussions surrounding the impact of tariffs on economic expansion, will be in sharp focus.
• The Fed is in no hurry to implement rate cuts; markets are pricing in the first potential easing only for the latter half of the year, with an initial move possible in September.
• The Fed would not have had an opportunity to comment on Moody's recent decision to downgrade the US credit rating.

Markets are currently pricing in a first potential rate cut for September, with an implied probability of 77%. While a July move had previously been mooted, significant uncertainty surrounding tariffs has pushed back expectations for an initial easing. New inflation projections due in June will provide a key input for market direction. Source: Bloomberg Finance LP, XTB

Implications for the Dollar and Wall Street

The US dollar has traded mixed in recent weeks. However, a shift has been observed since the start of this week; following recent gains in EURUSD, the pair has pulled back towards the 1.1300 mark. The dollar is gaining broadly today against most currencies, including the yen, where investor concerns are mounting amid rising government bond yields. US Treasury yields also remain elevated, reflecting uncertainty over the US fiscal outlook.

Yield differentials remain relatively tight. While yields in both the US and Europe have declined recently amid somewhat greater stability, US yields remain at elevated levels due to significant uncertainty. Source: Bloomberg Finance LP, XTB

Should the minutes reaffirm that the Fed is in no hurry to cut rates, the dollar could maintain or even extend its recent strength. Conversely, any indication of a greater willingness to ease monetary policy could exert short-term downward pressure on the USD.

EURUSD has retreated for a second consecutive session and is testing support at the lower boundary of its recent upward trend channel. Source: xStation5

Equity Market Impact

US equities have recouped a significant portion of their year-to-date losses, though they remain susceptible to uncertainty surrounding trade tariffs and the outlook for economic growth. The FOMC minutes could act as a catalyst for short-term volatility; however, the day's main event is undoubtedly Nvidia's Q1 2025 earnings release. Strong results and a positive outlook from the chipmaker would likely reinforce investor confidence in the recent Wall Street rally, although it should be noted that Nvidia continues to stand out with arguably the strongest growth metrics and forward guidance among the 'Magnificent Seven' tech cohort.

The US100 index is testing recent highs, mirroring the price action in Nvidia. Source: xStation5