The USD has rallied following the release of the latest Federal Reserve meeting minutes and as covid concerns weigh on risk sentiment.
The Fed minutes released last night indicate that policymakers are looking at reducing their bond-buying scheme (i.e. quantitative easing) by the end of the year as the US economy recovers from the Covid pandemic. Essentially, this would mean printing fewer dollars which is supportive of the currency and has led to demand from traders overnight.
However, there are reasons to be cautious over this move. First, talks of the Fed tapering quantitative easing this year has already been on the cards a lot recently, so it shouldn’t be much of a surprise to the markets. Secondly, these minutes were taken from the July meeting and we have seen some more disappointing US data prints since then, so opinions might have changed. Finally, the Delta covid variant has continued to spread aggressively.
Sterling lost some ground yesterday following weaker-than-expected inflation figures. Data showed prices (CPI) rose 2.0% year-on-year in July versus expectations for 2.2% and this was a fall from June. This data eases the rate hike expectations from the Bank of England in the short term and thereby reduces the appeal of the Pound. On the flip-side, it might also help calm some investors nerves that inflation is about to spiral out of control, which could help general risk sentiment in the longer term.
As a result, the GBP/USD trades at a 4-week low having conceded around 2-cents this week. The EUR/USD has broken to the lowest levels since November last year after losing a cent this week. The GBP/EUR continues to trade within a relatively tight – but buoyant – range and currently sits at the lowest levels of the week.
Dollar traders’ eyes will turn to Fed Chair Jerome Powell’s speech in Jackson Hole next week to see if he will make any further hints on reducing their quantitative easing efforts. As discussed above, however, the landscape has changed more recently so it seems unlikely but we shall have to see.