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Dollar soars on hawkish Federal Reserve minutes, COVID concerns

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23 August 2021

Written by
Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

Jitters about the possible impact of continued COVID restrictions worldwide favored the dollar last week.

he consensus seemed to be that the impact on growth expectations would be relatively more muted in the US than elsewhere, and the greenback benefitted from that and also a hawkish tone in the minutes of the last Federal Reserve meeting, which suggested a 2021 taper is a possibility. Commodity prices and commodity dependent currencies like the Australian and New Zealand dollars were the big losers in the G10 last week.

Market focus will now shift to the annual Jackson Hole meeting of world central bankers starting Thursday, as well as a spate of economic releases in the US and the Eurozone. As to the former, we expect that any communications from the Fed addressing the timing of policy tightening will be consistent with a late-2021 taper. As for the latter, the Eurozone PMIs for August out Monday and the PCE inflation report out of the US on Thursday will be the most important.


July inflation came out considerably below expectations, in another sign that there will be significant gaps in the size of the spike in inflation across economic zones. The news will strengthen the relative position of doves within the Bank of England, and sterling reacted by falling against both the dollar and the euro. Retail sales for July also missed expectations, although this was likely due to the inclement weather, Euro 2020 and ‘pingdemic’, and we think it will prove a temporary downturn.

The main news this week will be the release of the PMI indices of business activity on Monday. Markets expect another strong number consistent with a fast economic recovery in the UK, so there is limited room for a positive surprise that would buoy the pound.


As in the UK, we see limited scope for a market-moving surprise in the publication of the Eurozone PMIs on Monday. More important will be the release of the minutes of the European Central Bank’s July meeting.

Any hints of hawkishness in reaction to improved economic prospects and rising inflation could boost the euro, which may also benefit from favourable trader positioning and relative cheapness. On the other hand, heightened concerns among the committee surrounding the spread of the delta variant both domestically and globally would be a dovish development and could weigh further on the euro this week. The EUR/USD pair is already trading around its lowest level since November 2020.


The minutes of the latest Federal Reserve meeting were more hawkish than the markets were expecting, and it seems likely that the Fed will start tapering down its quantitative easing programme before the year is out. In fact, we now expect a September announcement of the taper, and hints to that effect to be dropped at the Jackson Hole confab this week. We have revised up our short- and medium-term forecasts for the US dollar accordingly.

Strong PCE inflation (this week) and payrolls report for August (next week) should seal the deal for Fed tapering. The real question is whether this will be enough to put an additional bid under the US dollar, given the large inflation differential that is developing between the US and other major developed economic areas and countries.

🎧 Listen to what our analysts have to say about the latest FOMC policy meeting and what they expect from the financial markets in August and early September.