iven the optimistic tone of the FOMC statement and the fact that GDP weakness was due to temporary factors, the sell-off in the greenback can probably be notched up to traders taking profit from the Dollar’s strong rise in July.

Dollar weakness was most pronounced against the Yen, which soared early Friday after the Bank of Japan disappointed market expectations for radical policy action.

Now that the Federal Reserve and Bank of Japan meetings are out of the way, focus shifts to the Bank of England’s expected easing on Thursday and the all important US labour market report on Friday. Thin summer holiday markets may well exaggerate currency moves over the next few weeks.

Major currencies in detail:

GBP

There was little new hard economic data out of the UK but surveys showing a deterioration of business and consumer sentiment post-referendum weighed on Sterling last week. The Pound was the worst-performing G10 currency save for the US Dollar.

This week will be critical for the Pound as the Bank of England meets on Thursday. The overwhelming market consensus is for a 25 basis point cut, which Martin Weale’s dovish statement last week appeared to confirm.

The pressing question is around the extent of the additional easing measures. We expect at least a £100 billion expansion in the purchase target. Market pricing is unclear on this issue, so we expect to see plenty of volatility towards the end of the week.

EUR

In a very quiet week, the Euro performed well, buoyed by weak US data and an IFO investors survey in Germany that seemed to shrug off the impact of the UK referendum.

The news late on Friday that regulators had decided to go relatively easy on European banks during the stress tests had no discernible impact on the common currency.

This week is also sparse in terms of economic or monetary news out of the Eurozone. Therefore, we expect the Euro to mostly react to events elsewhere, notably the Bank of England meeting on Thursday and the US labour report on Friday.

USD

A busy week in the US was not kind to the Dollar, although, as mentioned, we think this had more to do with month-end profit taking than any fundamental reappraisal of US economic and rate prospects.

The FOMC statement on Wednesday was quite optimistic. In fact, every single change from the previous statement reflected increased confidence in the outlook.

Friday’s first read on second-quarter growth came in well below expectations, at 1.2% as opposed to 2.5%. However, temporarily lower inventories accounted for essentially all of the negative surprise, therefore we can reasonably expect this gap to be made up in subsequent quarters.

Now that month-end trading is out of the way, we think the US Dollar rally will resume.

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