During Thursday's Asian trading session, EUR/USD is experiencing a period of consolidation after a sharp overnight rally, currently trading around 1.1672 and remaining firmly in the higher territory not seen since late May. Despite the Federal Reserve's July meeting minutes revealing a hawkish lean—with several officials suggesting that rate hikes would be necessary soon if inflation fails to cool—the market's reaction has been subdued. Soft economic data, combined with the US Treasury's announcement of an expanded long-dated bond repurchase program, are jointly weighing on the US dollar and limiting the downside for the euro. The probability of a Fed rate hike in September has fallen to roughly 33% from 47% a month ago, while the market still prices in a 90%-94% chance of a European Central Bank hike in September, with this policy divergence continuing to offer structural support for the euro.

The Fed Minutes Lean Hawkish, but Markets Focus on Soft Data

The Federal Reserve's July meeting minutes indicated that officials agreed they would likely need to raise interest rates again soon unless there was more progress on inflation. At the July meeting, the Fed held its benchmark rate steady at 3.5%-3.75%, with dissenters arguing for immediate action to bring inflation back to target. Since that gathering, most data have shown moderate monthly price increases, yet all key indicators still show inflation running well above the Fed's 2% objective. However, the market has largely shrugged off the hawkish minutes, as their content lags behind recent soft economic data, and futures markets have already compressed the probability of a September hike to around 33%. The CME FedWatch tool shows the odds of a 25-basis-point hike next month have dropped to 32.7% from 47% a month earlier. This dynamic is capping the dollar's upside and providing a floor for the euro.

Solid ECB Hike Expectations and Policy Divergence Underpin the Euro

On the euro side, market expectations for continued ECB tightening remain robust. According to the ECB watch tool, the probability of a 25-basis-point hike to 2.50% at the September 9 meeting is priced at 90%-94%. Analysts at Societe Generale note that the eurozone's macroeconomic backdrop is reinforcing recent shifts in rate differentials, stating that "improving growth expectations are underpinning relative rate moves initiated by higher inflation." This suggests that the initial rate repricing, driven by inflation, is now being validated by firmer growth prospects. This structural backdrop continues to support the euro.

Institutional Views

MUFG, in a research note dated August 19, adopted a cautious stance on EUR/USD, suggesting that the currency appears overvalued at current levels, with little appetite for buying. The institution highlighted European energy risks as a core concern: natural gas storage sits at low levels for this time of year, the lowest since 2011, and the pace of refilling ahead of winter is lagging expectations. Combined with competition for LNG from Asia, this could push energy costs higher. Additionally, low water levels on the Rhine and Danube rivers threaten industry, power generation, and food production. If these conditions persist, the terms of trade could deteriorate further, dragging on the euro.

ING, in its latest research, forecasts that the Fed will not hike rates and has set EUR/USD targets of 1.17 by end-September and 1.18 by year-end. The euro is not severely undervalued, but it is beginning to look cheap. The medium-term bullish narrative remains intact, though a breakout will require confirmation of the Fed's policy direction.

Summary

EUR/USD is consolidating after a sharp overnight advance. The hawkish-leaning Fed minutes have been met with a muted market response, as soft economic data have compressed September hike expectations to roughly 33%, leaving the dollar under pressure and providing support for the euro. Concurrently, the ECB's September hike probability remains elevated at 90%-94%, with policy divergence continuing to offer structural support for the single currency. Market attention now turns to ECB President Christine Lagarde's upcoming speech and the next round of US economic data for further directional cues.

As of 10:26 Beijing time on August 20, EUR/USD was trading at 1.1675/76.