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EUR/USD surges to halt skid, as timing of Fed rate hike remains unclear

Published 08/19/2015, 05:29 PM
Updated 08/19/2015, 05:35 PM
The euro gained more than 0.85% against the dollar on Wednesday to close above 1.11

The euro gained more than 0.85% against the dollar on Wednesday to close above 1.11

Investing.com -- EUR/USD surged on Wednesday halting a five-day losing streak, as the minutes from the Federal Open Market Committee's July meeting provided little to no indication that the U.S. central bank could raise interest rates before the end of the fall.

The currency pair traded between 1.1018 and 1.1135, before settling at 1.1121, up 0.0096 or 0.87% on the session. The euro closed above 1.11 against the dollar for the first time in four sessions. After Wednesday's gains, EUR/USD is now up by more than 2.65% over the last month of trading.

The pair likely gained support at 1.0808, the low from July 20 and was met with resistance at 1.1213, the high from August 12.

Following the completion of its July FOMC meeting three weeks ago, the Fed provided no explicit indications that it could raise short-term interest rates when it meets next in September. At the time, the Fed reiterated that it needed to see further improvements in the U.S. labor market and signals that long-term inflation had moved gradually toward its target of 2% before it decided to hike interest rates. The minutes from last month's meeting released on Wednesday showed that the Fed could continue to take a "data-driven" approach over the next weeks, before determining whether to raise short-term interest rates for the first time since 2006 when it meets next in September.

On Wednesday morning, the U.S. Bureau of Labor Statistics (BLS) said its Consumer Price Index (CPI) for the month of July ticked up 0.1%, following solid gains of 0.3% and 0.4% in June and May respectively. A modest gain in apparel prices failed to offset declines in electricity and auto prices. Airfare prices also weighed on the July CPI, after plunging 5.6% -- its sharpest monthly drop in two decades. Analysts expected the July CPI to increase 0.2% on a monthly basis.

The BLS' headline inflation reading also increased 0.2% on a year-over-year basis, after posting a yearly gain of 0.1% in June. The Core CPI, which strips out food and energy prices, also inched up 0.1% from its June level, below expectations for a 0.2% monthly gain. Over the last 12 months, the core reading has increased 1.8% after remaining unchanged from June.

The muted inflationary gains could appease dovish sentiments at the Fed for a delayed rate hike. Long-term inflation has failed to reach the Fed's annual 2% target for every month over the last three years.

A reading of the July minutes paints a picture of a sharply divided FOMC regarding their views on inflation. The FOMC said by some objectives the inflation data was "not progressing" toward its targeted goal, according to the minutes. Other members, however, said that inflation conditions for a rate hike would be met or could be "met shortly."

The Fed's benchmark Federal Funds Rate has remained at its current level between zero and 0.25% since 2009 at the conclusion of the Financial Crisis. In addition, nearly a decade has passed since the Fed has last raised the benchmark rate.

In June, all 17 members of the FOMC expected that the Federal Funds Rate should remain under 1% by the end of 2015, according to the Fed's Dot Plot, which provides a long-term forecast on the path of interest rates. However, the median member projected that the Federal Funds Rate will be between a range of 0.5 and 0.75% at that point -- signaling a rate hike at some point this year and an end to a zero interest rate policy.

Elsewhere, the German Bundestag approved the European Commission's third bailout of Greece by a 454-113 vote, clearing the final hurdle for the cash-strapped nation to beginning receiving a €86 billion stimulus package from its international creditors. Officials from the board of the euro zone's bailout fund confirmed that it approved the disbursement of the first tranche of funding to Greece, allowing it to make a €3.2 billion loan repayment to the European Central Bank on Thursday.

The U.S. Dollar Index, which measures the strength of the greenback versus a basket of six other major currencies, ended Wednesday's session at 96.45, down 0.64%. The index inched up to 96.53 minutes after the Fed's release, before falling slightly back in the final hours of the session.

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