EUR / USD
The IFO institute cut its German 2021 GDP growth forecast to 2.5% from 3.3% previously, primarily due to the impact of supply-side issues. Tight ranges prevailed ahead of Wednesday’s New York open with risk conditions relatively steady while there was caution ahead of the Federal Reserve policy decision.
ECB council member Muller stated that it would be troubling if there is a steep cliff effect after the conclusion of the PEPP bond purchases and that the central bank will discuss increasing the regular bond purchases to smooth conditions. Risk appetite gradually improved and the dollar edged lower with tentative Euro gains to 1.1735.
The Fed made no policy changes, in line with expectations. In its policy statement, the Fed recognised that the economy was continuing to strengthen and that progress had been made towards meeting its goals. It also confirmed that the inflation rate is on track to modestly exceed 2% for some time.
The statement added a specific reference that, if progress continues as expected, a moderation in the pace of asset purchases may be warranted soon.
As far as the interest rate projections from individual committee members are concerned, there was a limited net shift with 9 of 18 members now expecting the first rate increase in 2022 from 7 at the June meeting with the other nine projecting the first hike in 2023. The median 2023 rate projection was increased to 1.0% from 0.6%.
The overall tone of the statement and rate projections were slightly more hawkish than expected.
Chair Powell stated that the Fed plans to end asset purchases in the middle of next year if the economy remains on track. This comment was more hawkish than expected and reinforced expectations that an announcement would be made at November’s meeting. Powell did add that the Fed is still a long way from passing the lift-off test, but he did not signal significant concern over the Evergrande situation.
There was choppy trading with the dollar initially losing ground before posting significant gains to 1-month highs as Powell’s hawkish tone provided support. The Euro dipped lower to test support below 1.1700 with 1-month lows near 1.1680. The US currency retreated slightly on Thursday with the Euro just above the 1.1700 level.
Bank of Japan Governor Kuroda stated that household spending remains weak due to state of emergency measures which dampened yen support slightly.
US Treasuries edged lower into Wednesday’s New York open with a slight increase in yields and the dollar settled around 109.50 against the yen. As equity markets posted stronger gains, yen demand faded on the crosses with a limited dip in defensive support.
After a mixed initial reaction, the dollar gained renewed traction following Powell’s comments, but it was held below 110.00 as the yen resisted significant selling.
Asian market conditions were relatively calm with the acute Evergrande fears easing, although there was still a high degree of uncertainty. Expectations of liquidity support underpinned regional equity markets and the dollar traded around 109.80 against the yen with the Euro just above 128.50 amid a holiday in Tokyo.
Sterling was unable to make any headway in Europe on Wednesday with the Euro testing resistance above 0.8600 while the UK currency was contained below 1.3650 against the dollar. There was a significant advance for the FTSE 100 index, but the UK currency struggled to take advantage of the steadier risk tone.
Sterling did recover from lows as equity markets strengthened further into the Federal Reserve policy statement and the Euro was unable to hold the 0.8600 level.
After brief gains following the Fed statement, there were fresh losses against the dollar with 1-month lows close to 1.3600.
The Bank of England will announce its latest policy decision on Thursday with unease over the recovery profile dampening expectations of hawkish rhetoric. Markets will be monitoring rhetoric closely with a focus on whether a majority consider that conditions for an increase in rates have been met. Overall risk appetite held firm on Thursday which provided an element of support with Sterling edging higher to around 1.3640 against the dollar while the Euro traded close to 0.8580.
The Swiss franc held firm into Wednesday’s European close with the Euro securing only a slight net recovery to the 1.0830 area. There was choppy trading following the Fed policy meeting with the dollar settling with net gains to around 0.9265.
The National Bank will announce its latest policy decision on Thursday with no changes in interest rates expected, but the rhetoric will be watched closely with a particular focus on comments on the franc. The franc edged lower in early Europe with the Euro around 1.0840 and the dollar around 0.9260.