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Fed minutes strike dovish tone despite US growth rebound

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8 April 2021

Written by
Matthew Ryan

Matthew Ryan is Ebury’s Global Head of Market Strategy, based in London, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

The Federal Reserve continued to strike a dovish tone in its March meeting minutes released yesterday, despite the broad uptick in US economic activity brought about by the country’s impressive vaccine progress.

A
ccording to the minutes, officials remain cautious about the ongoing risks posed by the COVID-19 pandemic, and continued to stress that the bank will provide ongoing support to the economy until it is on a more secure footing. They stressed that the Fed remains a long way off reaching its goals of on-target inflation and full employment and there was little sense of urgency around the need to begin normalising monetary policy any time soon. Again, there was also little concern shown for the recent increase in US bond yields, which were instead viewed as a sign of a general improvement in the economic outlook.

With nothing particularly noteworthy out of yesterday’s FOMC minutes, the market reaction was fairly limited. Most major currencies ended London trading on Wednesday roughly where they began it, although a clear exception to this was sterling. The pound has been on a clear downward trend in the past few sessions amid a modest reversal in vaccine euphoria that had sent sterling to the top of the G10 FX performance tracker for 2021. Concerns largely centre around the safety of the AstraZeneca vaccine, which the UK has relied heavily on since its vaccination programme began in December. According to regulators, the vaccine remains safe for use, although unusual blood clots will now be listed as a possible ‘very rare’ side effect.

Federal reserve

The UK will continue offering the jab, although it will use alternatives for those under the age of 30 with no pre-existing health conditions as a precaution, i.e those that are at extremely low risk of becoming seriously ill with the virus. Many nations in the EU have taken a far more cautious approach, with the likes of Spain, Italy, Belgium, France and Germany all restricting the jab to those over the ages of either 56 or 60. Given the extraordinarily rare occurance of these blood clots, the approach adopted in the EU appears overly cautious and may do more harm than good, particularly given how poorly the bloc has done with its vaccine rollout so far.

Investors haven’t seemed to punish the common currency too much so far this week, with EUR/USD continuing to hover around the 1.19 level this morning, its strongest position in over two weeks. We don’t expect too much new information to come out of this afternoon’s European Central Bank meeting accounts, although currency traders will be keeping one eye on its release. Aside from that, this afternoon’s US initial jobless claims data should give us a good indication as to the current health of the US labour market.

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