Comments from Fed Chair Powell were relatively dovish with the pledge of further monetary support.

Comments from Fed Chair Powell were relatively dovish with the pledge of further monetary support.

US bond yields edged lower despite the high degree of inflation uncertainty. Risk appetite was soothed by Powell’s comments, although caution was still in evidence. Wall Street equities secured slight gains while markets were mixed in Asia.

The dollar weakened slightly on Powell’s comments, although it was resilient. EUR/USD found support above 1.1800 but held just below 1.1850. Sterling pared gains as it failed to break resistance amid policy uncertainty and cautious comments from Governor Bailey.

The Canadian dollar lost ground with Bank of Canada rhetoric slightly less hawkish than expected. The Australian dollar also failed to make further headway despite firm jobs data.

Euro-zone industrial production declined 1.0% for May compared with expectations of a 0.2% fall with a year-on-year increase of 20.5% from 39.4%. Narrow ranges prevailed ahead of the New York open with the Euro unable to make significant headway.

US producer prices increased 1.0% for June, above market expectations, with a year-on-year increase of 7.3% from 6.6% previously. Underlying prices increased 5.6% over the year from 4.8% and above expectations of 5.1%.

In prepared testimony Fed Chair Powell stated that strong increases in employment are expected to continue in the coming months as the healthcare crisis subsides. He added, however, that monetary policy will continue to provide strong support until the recovery is complete and he reiterated that the job market is still lagging the pace required to begin a tapering of bond purchases. There will be a further debate over policy in the next few weeks.

According to Powell, inflation is expected to remain elevated in the coming months before dropping, although he did admit that there was a high degree of uncertainty over developments. He also insisted that the central bank would provide advance notice before announcing a decision to make changes to Fed policy.

The overall tone of the statement was relatively dovish with Powell offering reassurance that there would be no early move to tighten policy and the US dollar lost ground with EUR/USD advancing to the 1.1830 area. The US currency resisted further selling on Thursday with EUR/USD held around 1.1830.

US Treasuries gradually posted gains after the New York open with no major alarms from the latest inflation data while Powell’s comments were generally dovish. The 10-year yield retreated to near 1.36% which eroded dollar support and USD/JPY retreated to test the 110.00 area.

Equity markets held a firm tone, although overall moves were limited as markets continued to monitor inflation developments. The Federal Reserve Beige Book reported that demand was generally strong, although there were further uncertainties over supply constraints while the labour market remained tight. Pricing pressures remained broad based and most respondents expected that there would be further upward pressure on prices in coming months.

The latest annual Chinese GDP data was slightly lower than expected at 7.9% for the second quarter while industrial production and retail sales data was above market expectations. The yen was resilient on the crosses and USD/JPY retreated to the 109.80 area with EUR/JPY testing 130.00.

Sterling continued to make headway in early Europe on Wednesday as the higher-than-expected inflation data continued to trigger expectations of a tighter Bank of England policy within the next few months. Bank Deputy Governor Cunliffe stated that it is more difficult to assess the inflation outlook given the unprecedented situation. He added that the bank will reassess the outlook in August. The UK currency secured net gains, but it was unable to break significant resistance levels with GBP/USD selling interest on approach to 1.3900 while GBP/EUR found resistance close to 1.755.

The UK currency gradually retreated after the New York open with coronavirus reservations also having some impact in curbing support, especially with US equities unable to make headway.

Bank of England Deputy Governor Ramsden stated that he can see the potential for monetary policy tightening earlier than he expected previously with greater weight on the inflationary scenario rather than deflationary one. Governor Bailey stated that the bank will not be rushing into raising rates despite rising inflation with the bank needing to assess all the evidence on whether the increase is transitory.

Bailey’s comments hampered Sterling as GBP/USD drifted around 1.3850 while GBP/EUR rallied to just above 1.1750 before retreating. Jobs data was mixed with a lower than expected employment increase, but stronger average earnings growth nudged the UK currency higher.

Economic Calendar

07:00GBP Average Earning Including Bonus(MAY)6.60%5.70%
07:00GBP Claimant Count Change(M/M)(JUN)-92.6K
07:00GBP Unemployment Rate(MAY)4.70%4.70%
09:30BoE Credit Conditions Survey
10:00CPI (EU Norm) Prelim MM(JUL)0.10%
10:00CPI (EU Norm) Prelim YY(JUL)1.30%
10:00CPI (EU Norm) Final MM*(JUL)0.20%
10:00CPI (EU Norm) Final YY*(JUL)1.30%
11:00BoE MPC Member Michael Saunders
12:00Monthly Oil Market Report
13:30USD Initial Jobless Claims373K
13:30USD Continuing Jobless Claims3313K3339K
13:30NY Empire State Manufacturing Index(JUL)17.4
13:30USD Philadelphia Fed. Manufacturing Index(JUL)2830.7

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.