EUR / USD
The Euro was unable to make any headway ahead of Wednesday’s New York open with tight ranges prevailing as the dollar overall maintained a solid tone in markets.
St Louis Fed President Bullard maintained his hawkish tone with comments that the Fed was behind the curve according to traditional post-Volcker metrics. He also wanted the tapering of bond purchases to be completed by the first quarter of 2022 to leave the door open for interest rate hikes if required. His base case, however, was that a rate hike would be appropriate in the fourth quarter of 2022.
The dollar maintained a strong tone into the European close and posted 4-month highs while the Euro dipped below 1.1700 to fresh 4-month lows, although there was a lack of follow-through selling as major players defended option positions amid low trading volumes.
A key feature of the Federal Reserve minutes was a notable divergence in opinions. Some members stated that the committee should start preparing to limit asset purchases as soon as possible while other participants noted that employment remained well below its pre-pandemic level and that coronavirus may have resulted in longer-term labour-market changes. While some members expressed concerns that inflation had already exceeded or would shortly exceed the 2% target, other members emphasised the temporary nature of inflation and were concerned over the possibility that major downward pressure on inflation would resurface.
Participants generally judged that the committee’s standard of substantial further progress had not yet been reached, but the committee overall also stated that it could be appropriate to start tapering bond purchases this year. The dollar dipped lower in an immediate reaction, but quickly clawed back losses with markets expecting tapering.
The US dollar then strengthened sharply during Thursday’s Asian session with the US currency hitting 9-month highs amid reservations over global growth conditions and fragile risk conditions. The Euro also retreated to 1.1670 and the lowest level since early November 2020 as commodity currencies lost ground.
US housing starts declined to an annual rate of 1.53mn for July from a revised 1.65mn previously and below consensus forecasts of 1.60mn, although there was an increase in building permits to 1.64mn from 1.59mn in June. There was little immediate reaction to the US housing data, but Treasuries did retreat after the New York open while equity futures were little changed with an element of support on dips. There was a decline in demand for defensive currencies as risk conditions stabilised and the dollar advanced after Wall Street open. The US currency also maintained a firm tone and tested the 110.00 level at the European close.
Wall Street equities moved lower following the Fed minutes while US bond yields moved lower. In this environment, the dollar retreated to the 109.75 area.
Japan’s Tankan index strengthened to 33 for August from 25 previously and the highest level since January 2018 while the services sector also posted net gains which helped stabilise yen sentiment. Asian equity markets overall posted net losses on Thursday, but the yen edged lower with the dollar holding above the 110.00 level as firm underlying US demand dominated currency markets while the Euro settled around 128.50 as choppy trading continued.
Sterling edged lower following the weaker than expected inflation data which dampened expectations that the Bank of England would look for an early tightening of monetary policy. There was a retreat to 3-week lows around 1.3730 against the dollar while the Euro edged higher to 0.8530.
Sterling was unable to secure a significant recovery against the dollar, but the Euro retreated to around 0.8510 as the overall risk appetite stabilised. There were fresh reservations over global growth conditions which limited potential support for the UK currency as the Afghanistan situation also tended to limit domestic influences.
The UK currency settled little changed at the New York close with some resilience despite a slide in global equity markets. Dollar strength dominated in Asia on Thursday with Sterling at 4-week lows close to 1.3700 while the Euro continued to hold just above 0.8500 with fragile risk conditions.
The Swiss franc was unable to make further headway on Wednesday with potential buying limited by moderation in demand for low-yield currencies. There was also further speculation that the National Bank would intervene to push the currency weaker.
The Euro strengthened to the 1.0740 area after finding support near 1.0700 while the dollar secured net gains to around 0.9185 at the European close. The franc failed to secure fresh support on Thursday despite global growth reservations with the dollar testing the 0.9200 area.