This week, the foreign exchange market's primary focus is on the Federal Reserve's policy direction, with the first FOMC meeting minutes under new Chair Kevin Warsh set to be released, providing crucial guidance for the US dollar's trajectory. Integrating the latest market data, central bank commentary, and geopolitical policy expectations, the outlook for major currencies this week appears clear: the US dollar retains resilience, the euro's rebound potential is limited, the British pound awaits clarity from UK politics, and the Japanese yen continues to be influenced by intervention expectations, presenting a fragmented market landscape overall.

US Dollar: Hawkish Minutes Provide a Floor, Upside Risks Persist

With US markets reopening after a long holiday, overall FX market activity has been relatively subdued, and G7 currency volatility has retreated to long-term lows. As the summer trading lull approaches, carry trade sentiment is warming up. Among G10 currencies, the US dollar's short-term deposit rates remain elevated, indicating a lack of strong fundamental logic for market participants to short the dollar and making it difficult for bearish positions to expand significantly.

The weak US June jobs data released last Thursday did not significantly pressure the dollar, highlighting its defensive attributes. Looking at market fundamentals, US short-term rates have been trending higher since April, while money market expectations for a Fed rate hike this year have continued to cool. Current pricing suggests just 31 basis points of tightening this year, a significant drop from the 43 basis points expected at the end of last month, reflecting a more rational market assessment of Fed policy.

The key market focus this week is the June FOMC meeting minutes, scheduled for release on Wednesday, which will be the first under Chair Kevin Warsh. These minutes are expected to continue the new team's concise and streamlined style, with content significantly condensed, making it difficult for markets to discern policy disagreements among members. However, the core tone is likely to maintain a hawkish stance. After failing to meet its price stability target for five consecutive years, the Fed's policy focus has returned to inflation control, with most members inclined to keep subsequent rate hikes on the table, which should continue to support the dollar.

Regarding the USD/JPY pair, the price action is gradually stabilizing and recovering. The Bank of Japan refrained from any FX intervention during last week's holiday, pushing the pair back above the 162 level. This suggests Japanese authorities are inclined to use their limited foreign exchange reserves cautiously, adopting a more conservative intervention rhythm. However, market intervention concerns have not completely dissipated. The period leading up to Japan's next public holiday on July 16-17 remains a potential intervention window, which may limit the pair's upside. Intraday focus will be on the US June ISM Services PMI, expected to remain stable overall, consistent with US economic growth around 2%. Meanwhile, the Prices Paid index is anticipated to retreat from a four-year high, potentially offering slight, short-term relief from inflation pressures. Technically, support for the US Dollar Index (DXY) around the 100.60 level appears solid, with a bias for an upward move this week.

Euro: Rebound Potential Constrained, Awaiting Central Banker Comments

The EUR/USD rate is currently holding above 1.1400, with its movement primarily influenced by global central bank policy expectations, geopolitical developments, and fluctuations in US equities. Regarding ECB policy expectations, the market assesses the probability of a September rate hike as below 50%. However, core inflation risks remain volatile and are likely to stay elevated in the coming months, making it premature to declare the inflation pressure completely over. The ECB's monetary policy thus retains room for further tightening.

Several key ECB officials, including Isabel Schnabel and Philip Lane, are scheduled to speak publicly this week. Their policy remarks will provide clear guidance for the euro's short-term direction.

In terms of exchange rate movement, supported by hawkish Fed expectations, the US dollar is generally strengthening this week, directly capping the euro's rebound momentum. The immediate key resistance for EUR/USD is seen around 1.1475, with limited upside above that level. Until a new clear signal for Fed rate hikes emerges, EUR/USD is likely to oscillate within the 1.13-1.14 range, with a clearer trend potentially only emerging by the end of the quarter.

British Pound: Politics Enters Critical Window, Heightened Volatility Risk Ahead

The EUR/GBP rate experienced a significant decline last week, offering strong directional signals. The core driver of this drop was concentrated GBP short positions. Coupled with declining summer market volatility and stabilizing exchange rates, the market is unwilling to continue bearing the pound's annual funding cost of approximately 2%. Unwinding of these carry trades further pressured GBP crosses, a trading logic expected to dominate this week and difficult to reverse in the short term.

UK politics will become the core variable for the pound later this month. On July 20, Andy Burnham, MP for Markfield, is highly likely to become the UK's new Prime Minister, followed by the announcement of the new Chancellor of the Exchequer. Currently, Energy Secretary Ed Miliband is the frontrunner for the position. His policy stance is considered left-leaning, and the market widely expects him to depart from the gradualist policy pace of the Starmer-Reeves era, adopting a more aggressive fiscal adjustment style.

However, fundamental constraints are significant. Without new taxes, the UK's fiscal adjustment space is extremely limited. Combined with market expectations that the Bank of England will likely keep rates on hold, not hike, this year, these multiple headwinds suggest the pound's recent rally may face corrective pressure.

In the short term, from a technical perspective, focus is on the EUR/GBP support level at 0.8545. Whether this level holds will determine the short-term directional bias for the pound ahead of the new political developments.