EUR / USD
Euro-zone money supply growth strengthened to 10.2% in the year to July from 9.2% previously and the strongest rate of growth since April 2008.
Reservations over Euro-zone coronavirus developments had little impact despite a 4-month high in French cases. Narrow ranges prevailed ahead of the New York open with inevitable caution ahead of comments from Fed Chair Powell. The dollar edged higher, although movement was limited with some Euro support below 1.1800.
US initial jobless claims increased slightly to 1.01mn in the latest week from 1.10mn and fractionally above consensus forecasts. Continuing claims declined to 14.53mn from 14.76mn, although above market expectations. Second-quarter GDP data was revised to a contraction of 31.7% from 32.9% and slightly stronger than forecasts.
The principal focus was on Fed Chair Powell’s speech to the Jackson Hole symposium as he outlined the new policy framework.
Powell confirmed that the central bank would adjust the inflation target to an average of 2% with employment given greater importance in achieving goals. The central bank is now more confident that higher employment will not lead to higher inflation and the economy will be allowed potentially to run at a faster rate in an attempt to boost long-term employment. The implication is inevitable that interest rates will remain at very low levels for a longer period and potentially undermine the dollar, although details were sketchy. Markets will be looking for further details in September. There were no comments on yield-curve control or negative interest rates.
The dollar dipped sharply on the announcement with the Euro strengthening to 1.1900. There was then a sharp turnaround with the dollar gaining ground, but dollar selling interest on rallies with the Euro settling near 1.1820. The dollar weakened again on Friday amid expectations of long-term losses with the Euro near 1.1870.
The dollar was held in tight ranges ahead of the New York open. The US dollar dipped after the comments from Fed Chair Powell with lows around 105.60 as US yields moved lower. There was, however, a reversal in Treasuries as the 10-year yield moved higher on expectations that inflation would move higher over the medium term. Higher yields were significant in triggering a dollar recovery with the US currency recovering to daily highs around 106.50.
In his acceptance speech, President Trump threatened to end the reliance on China once and for all and political tensions will inevitably be a key feature during the campaign. House Speaker Pelosi stated that the Democrats were willing to compromise with a $2.2trn stimulus bill, but no evidence that talks were making headway.
Risk appetite was underpinned by approval for a low-cost Antigen coronavirus test, although Asian markets were mixed. The dollar strengthened to highs near 107.00 as 10-year yields hit 2-month highs and yen demand initially remained weak, but the wider losses pulled the dollar lower. Japanese Prime Minister Abe announced his resignation on Friday which supported the yen on expectations of a less aggressive Bank of Japan policy and the dollar dipped to 106.25 as the Euro pared gains.
Following the resignation of EU trade commissioner Hogan, the EU Commission announced that Dombrovskis would take temporary charge of the portfolio. Markets continued to monitor trade rhetoric, but global moves dominated with the UK currency initially moving sharply higher following Fed Chair Powell’s speech, briefly hitting 2020 high just above 1.3280. There was a sharp reversal with lows around 1.3160 before consolidation above 1.3200. The UK currency maintained a firm overall tone with the Euro dipping to 5-week lows near 0.8930 before a correction. Comments from Bank of England Governor Bailey will be watched closely on Friday.
Media reports suggested that EU has warned Prime Minister Johnson that he had less than two weeks to save post-Brexit trade and security talks. Political pressure will intensify as the summer holiday season ends. According to reports, EU chief negotiator Barnier and UK counterpart Frost will hold emergency talks next week. The Lloyds business barometer recovered to -14 for August from -22 previously, the largest monthly improvement for 3 years. Sterling held a strong tone on Friday and traded around 1.3270 against the vulnerable dollar with the Euro trading just below 0.8950 despite trade concerns.
The Swiss franc was subjected to choppy trading on Thursday with the Euro closing with marginal losses after failing to hold above 1.0750 while the dollar failed to hold a recovery move above 0.9100 amid underlying selling interest.
There will be expectations of extremely low Federal Reserve interest rates over a prolonged period which will tend to underpin the Swiss currency. The Euro edged higher on Friday with the dollar close to 0.9050 as longer-term currency debasement fears provided net support for the Swiss franc.