US dollar extends sell-off after dovish Fed minutes

The US dollar was broadly weaker once again on Thursday, as investors continued to digest the dovish remarks in the Federal Reserve's latest meeting minutes.

Summary:

• USD weaker for the second straight day, as investors digest this week’s dovish FOMC meeting minutes.
• ECB meeting accounts warn over risk of entrenched inflation, suggest more interest rate hikes in the Euro Area on the way.
• Scottish Independence ruling has little impact on GBP. BoE member Ramsden says more hikes on the way, but strikes a measured approach.

The Fed has been the most active central bank in the G10 since the start of the year, though signs of both an easing in US inflationary pressures and a dovish tilt in the bank’s communications have acted to calm the market’s rate hike expectations in the past few weeks. In its latest minutes, released on Wednesday, the bank noted that a majority of the committee were of the view that an easing in the pace of US rate hikes may soon be needed. Barring a significant upside surprise in either or both of the upcoming inflation and nonfarm payrolls reports, this effectively confirms that the Fed will revert back to a 50bp rate hike at its December meeting, bucking the recent trend that has seen four consecutive 75bp rate increases.

By contrast, investors believe that the European Central Bank still has a little ways to go before it takes its foot completely off the pedal. Yesterday’s ECB meeting accounts largely struck a hawkish note. In them, the bank both stated that it would continue raising rates in the event of a shallow recession, while warning of the risks that inflation could become entrenched. These remarks were echoed by ECB member Schnabel on Wednesday, who said that rates would need to be raised further into restrictive territory to put inflation back on a sustainable path towards 2%. Interestingly, the euro was among the underperforms yesterday, ending the London session largely unchanged on the greenback.

News out on Wednesday that Scotland’s parliament will be unable to hold a independence referendum without Westminster consent has had little impact on sterling. Markets clearly see the risk of another vote as remote, while it is far from guaranteed that Scots would even vote in favour of independence anyway - the most recent opinion polls suggest that they wouldn’t. Of far more importance for the pound is the market’s expectations for Bank of England interest rates. BoE member Ramsden, admittedly one of the more hawkish members of the MPC, said on Thursday that he saw more rate hikes ahead, though he wouldn’t be opposed to cuts should the economy and inflation pan out differently to his expectations.

Activity in the FX market is likely to be relatively light on the ground today, particularly due to the US Thanksgiving holiday this week. Q3 GDP data out of Germany this morning will likely go unnoticed, as this will merely be a revision to the preliminary print. ECB member De Guindos will also be speaking today, though he has made a number of appearances of late so we don’t expect any fireworks.