Dollar: Market Focuses on Fed Minutes as Rate Cut Doubts Intensify – Commerzbank

The Dollar Index is consolidating weakly around the 99.38 level, with market sentiment cautious. Investors are turning their attention to the upcoming release of the Federal Reserve meeting minutes, seeking clearer clues on policymakers' views regarding the future rate path, particularly the timing and conditions for rate cuts. Previously weak U.S. economic data has significantly dampened market expectations for rate hikes, and any internal divisions revealed in the minutes will be key to influencing the dollar's short-term fluctuations.

**Rate Cut Expectations and Internal Divisions in Focus**

Market bets on further Fed policy easing have already heated up. According to London Stock Exchange Group data, the market had priced in as high as an 84% probability of a 25-basis-point rate cut. However, these expectations are now being tested. Reports suggest that internal divisions within the Fed over rate cuts appear greater than they have been in a long time, with some policymakers uneasy about a December cut, potentially forming a slim majority in opposition. This rare degree of divergence makes the details of discussions regarding the "removal of easing bias" language in the upcoming minutes a crucial barometer for gauging the Committee's overall hawkish tilt.

**Contradictory Inflation and Employment Data Intensify Divergence**

The divergence among policymakers stems from conflicting economic signals. On one hand, inflationary pressures show signs of rebounding, with data revealing the April CPI annual rate accelerating to 3.8% and the PPI annual rate posting its largest gain since 2022 at 6.0%, intensifying concerns among some officials about the persistence of inflation. On the other hand, while the labor market added more jobs than expected, the overall trend is considered to have shown signs of weakening, providing a rationale for rate cuts. How the minutes characterize inflation—as "transitory" or more "persistent"—will directly impact the market's longer-term assessment of the neutral rate.

**Financial Stability Risks Under Scrutiny**

Beyond inflation and employment, financial stability issues may also feature prominently in the minutes. According to reports from Wall Street News, some participants had expressed concerns about "excessively high asset valuations" in financial markets, emphasizing the risk of disorderly declines in stock prices, particularly in technology sectors related to artificial intelligence. These discussions indicate that the Fed is strengthening its monitoring of financial imbalances when weighing monetary policy, and any related hints could unsettle risk asset sentiment.