The Federal Reserve statement was slightly more hawkish than expected.

The Federal Reserve statement was slightly more hawkish than expected with the Fed looking to start tapering bond purchases soon while rate projections edged higher.  Chair Powell stated that the Fed wanted to complete bond purchases around mid-2022.

The dollar reversed initial losses to post significant net gains to 1-month highs. EUR/USD dipped below 1.1700 before edging back above this level on Thursday.

Risk appetite overall was boosted by reduced contagion fears surrounding China and Evergrande. Wall Street equities posted gains, but retreated from intra-day highs after Powell’s comments. Asian equities posted net gains amid hopes of liquidity injections and China’s ability to contain the Evergrande situation.

Sterling was unable to make significant headway despite firmer risk conditions with caution ahead of the Bank of England statement. Commodity currencies pared gains after the Fed, but were underpinned by firmer risk conditions.

The IFO institute cut its German 2021 GDP growth forecast to 2.5% from 3.3% previously, primarily due to the impact of supply-side issues. Tight ranges prevailed ahead of the Wednesday’s New York open with risk conditions relatively steady while there was caution ahead of the Federal Reserve policy decision.

ECB council member Muller stated that it would be troubling if there is a steep cliff effect after the conclusion of the PEPP bond purchases and that the central bank will discuss increasing the regular bond purchases to smooth conditions. Risk appetite gradually improved and the dollar edged lower with tentative EUR/USD gains to 1.1735.

The Fed made no policy changes, in line with expectations. In its policy statement the Fed recognised that the economy was continuing to strengthen and that progress had been made towards meeting its goals. It also confirmed that the inflation rate is on track to modestly exceed 2% for some time.

The statement added a specific reference that, if progress continues as expected, a moderation in the pace of asset purchases may be warranted soon.

As far as the interest rate projections from individual committee member are concerned, there was a limited net shift with 9 of 18 members now expecting the first rate increase in 2022 from 7 at the June meeting with the other nine projecting a first hike in 2023. The median 2023 rate projection was increased to 1.0% from 0.6%.

The overall tone of the statement and rate projections were slightly more hawkish than expected.

Chair Powell stated that the Fed plans to end asset purchases in the middle of next year if the economy remains on track. This comment was more hawkish than expected and reinforced expectations that an announcement would be made at November’s meeting. Powell did add that the Fed is still a long way from passing the lift-off test, but he did not signal significant concern over the Evergrande situation.

There was choppy trading with the dollar initially losing ground before posting significant gains to 1-month highs as Powell’s hawkish tone provided support. EUR/USD dipped lower to test support below 1.1700 with 1-month lows near 1.1680. The US currency retreated slightly on Thursday with EUR/USD just above the 1.1700 level.

Bank of Japan Governor Kuroda stated that household spending remains weak due to state of emergency measures which dampened yen support slightly.

US Treasuries edged lower into Wednesday’s New York open with a slight increase in yields and USD/JPY settled around 109.50. As equity markets posted stronger gains, yen demand faded on the crosses with a limited dip in defensive support.

After a mixed initial reaction, the dollar gained renewed traction following Powell’s comments, but USD/JPY was held below 110.00 as the yen resisted significant selling.

Asian market conditions were relatively calm with the acute Evergrande fears easing, although there was still a high degree of uncertainty. Expectations of liquidity support underpinned regional equity markets and USD/JPY traded around 109.80 with EUR/JPY just above 128.50 amid a holiday in Tokyo.

Sterling was unable to make any headway in Europe on Wednesday with GBP/EUR testing support around 1.1615 while GBP/USD was contained below 1.3650. There was a significant advance for the FTSE 100 index, but the UK currency struggled to take advantage of the steadier risk tone.

Sterling did recover from lows as equity markets strengthened further into the Federal Reserve policy statement and EUR/GBP was unable to hold the 1.1650 level.

After brief gains following the Fed statement, there were fresh GBP/USD losses with 1-month lows close to 1.3600.

The Bank of England will announce its latest policy decision on Thursday with unease over the recovery profile dampening expectations of hawkish rhetoric. Markets will be monitoring rhetoric closely with a focus on whether a majority consider that conditions for an increase in rates have been met.

Economic Calendar

08:15Markit Mfg PMI(SEP)5730.00%57.5
08:15Markit Serv PMI(SEP)5756.3
08:30CHF SNB Interest Rate Decision-0.75%
08:30EUR German PMI Composite(SEP)62.260
08:30EUR German PMI Services(SEP)60.8
08:30EUR German Manufacturing PMI (M/M)(SEP)6562.6
09:00Euro-Zone PMI Composite(SEP)59.859
09:00Euro-Zone PMI Manufacturing(SEP)6261.4
09:00Euro-Zone PMI Services(SEP)59
12:00BOE MPC Vote Cut(SEP 01)0
12:00BOE MPC Vote Hike(SEP)0
12:00BOE MPC Vote Unchanged(SEP)8
12:00BoE QE Purchase Target(M/M)(SEP)875B875B
12:00BoE Rate Decision(M/M)(SEP)0.10%
13:30USD Chicago Fed National Activity Index(SEP)0.53
13:30CAD Retail Sales (M/M)(AUG)4.40%4.20%
13:30CAD Retail Sales Ex Autos (M/M)(AUG)4.60%4.70%
13:30USD Initial Jobless Claims320K332K
13:30USD Continuing Jobless Claims2650K2665K
14:45USD Manufacturing PMI(SEP)62.561.1
14:45USD Markit Services PMI(SEP)59.555.1
14:45USD Markit PMI Composite(SEP 01)58.355.4
23:45NZD Trade Balance (M/M)(AUG)-402M
23:45NZD Trade Balance (Y/Y)(AUG)-1100M

*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.