• The greenback has gained ground in response to safe-haven flows.
• Hawkish FOMC minutes are expected due to various reasons.
• Fresh dollar strength may come from rising yields.

Win-win for the dollar? That seems to be the case for the world's reserve currency as it awaits the main event of the week – the FOMC Meeting Minutes. In this preview, I will lay out why the greenback's only way is up.

How is it winning so far? The US has been publishing disappointing economic figures in the past two days. The S&P Global Services PMI tumbled, New Home Sales collapsed and Durable Goods Orders "only" missed expectations.

That led to worries about US growth, which would adversely impact the entire world, and eventually triggered safe-haven flows to the US dollar. These same economic figures also pushed investors to lower their bets on the Federal Reserve's path of rate hikes, softening bond yields.

How could the dollar win next?

The FOMC Meeting Minutes are released later in the day and they reflect the views of the broader team at the central bank, not only the one agreed on in the statement. Since that May 4 decision, both Nonfarm Payrolls and the Consumer Price Index beat expectations, leading to more hawkish tones from Fed Chair Jerome Powell.

But Powell was only the latest to join the strong anti-inflation rhetoric – some of his colleagues such as James Bullard, Esther George and Raphael Bostic have already been voicing such opinions in public. The meeting minutes will likely reflect more hawkish views.

Another argument in favor of a more hawkish tone is an attempt to show the Fed is in control – restoring its credibility as having the upper hand against rising inflation. I want to stress that the Meeting Minutes are not a raw description of what happened in the meeting. They are edited to reflect a message that the bank wants to convey to markets – and that message is hawkish.

What to expect

What would a hawkish tone sound like? It would probably show a desire by some to leave the door open to raising rates by 75 bps. Powell talked about two 50 bps moves but rejected a larger one. He's not alone.

Another hawkish twist would be if some hawks – or even a majority of members – suggest to actively sell Mortgage-Backed Securities (MBS) in order to cool the bubbling housing market. That would mean withdrawing money out of markets at a faster pace – like printing money faster, just in reverse.

In case my analysis is correct and the minutes go further than the decision, bond markets should move to reflect a more aggressive path of rate hikes. In turn, that should give the dollar another boost.

So, the greenback gained ground despite lower bond yields. If they rise, there is more room for dollar rallies.

USD/JPY Technical Setup

As usual, I recommend focusing on USD/JPY when trading US events. Higher yields will push the pair higher – contrary to trading the economic data in recent days, which pushed dollar/yen lower in response to disappointments.

The upside target is 127.60, followed by 128.10 – both played a role in the pair trading in recent days. Support is at 127, followed by 126.35.