Dollar has best day since early-June after FOMC minutes

A less dovish-than-expected set of meeting minutes from the Federal Reserve provided some much needed support for the US dollar on Wednesday.

The dollar has sold-off hard in the past few weeks, teetering around its lowest level since May 2018 versus the euro and in trade-weighted terms on Wednesday afternoon. We have been saying in the past couple of weeks or so that a short-term correction in the dollar may, however, be on the cards given stretched investor positioning, albeit a catalyst may be needed to instigate such a turnaround. The catalyst for yesterday’s move at least came in the form of the FOMC meeting minutes, which delivered slightly mixed signals to investors.

The minutes talked up heightened risks from the virus, reiterating that a ‘highly accommodative stance of monetary policy [is] likely needed for some time'. There does, however, appear to be little appetite among some members of the committee for the use of yield curve control, in which the Fed would purchase a certain amount of bonds in order to cap yields at a particular level. According to the minutes ‘many participants judged that yield caps and targets were not warranted in the current environment but should remain an option that the FOMC could reassess in the future if circumstances changed’.

There was also no consensus surrounding the immediate need to change forward guidance. There had been speculation prior to the meeting that the Fed could signal it is ready to adopt an average inflation target, and would thus look through short-term above target inflation. Comments on this were very vague and there was certainly no sense that an announcement regarding this was at all imminent. This was largely good news for the dollar, which registered its strongest daily performance since early-June, rallying by almost one percent for the day versus the euro.

Will the ECB meeting accounts shift the euro today?

Attention today now shifts to the ECB, which will also be releasing the accounts from its latest monetary policy meeting. The minutes from the Governing Council tend to be slightly more low key than its US counterpart, so we’re not expecting too much in the way of major market moving news - particularly given the likelihood of no immediate change in policy. That being said, investors will be keeping a close eye on any comments regarding the bank’s view of the state of the Euro Area economy and whether it appears on course for a ‘V-shaped’ recovery.

Aside from that, investors will have one eye on tomorrow morning’s Eurozone PMI data for August, which is expected to come in largely unchanged on the July data. Today looks set to be a relatively quiet day in the UK, although Friday will also see the release of the latest UK PMI numbers and July retail sales. News that sales growth moved back into positive territory year-on-year for the first time since the start of the pandemic could provide a bit of a lift for sterling, which is currently back trading where it was at the beginning of the week versus the dollar following yesterday’s rally in the latter.