The Fed minutes were less dovish than expected as there were fresh concerns over the economic outlook.

The US dollar secured a limited correction into Wednesday’s European close. The Fed minutes were less dovish than expected with little enthusiasm for yield curve control while there were fresh concerns over the economic outlook.

The dollar posted a stronger recovery following the minutes with EUR/USD dipping below 1.1850 and the US currency held gains on Thursday. Risk appetite was more fragile following the minutes with fresh growth concerns.

Sterling also corrected sharply with GBP/USD below 1.3100 from 7-month highs above 1.3250. Commodity currencies also lost ground, especially with weaker equities and AUD/USD dipped below 0.7200.

The Euro-zone current account surplus widened to EUR21bn for June from EUR11bn the previous month while the 12-month surplus amounted to EUR267bn and 2.2% of GDP. The current surplus position will provide underlying Euro support, especially when compared with the US deficit.

The single currency overall was subjected to a limited correction ahead of Wednesday’s European close with the currency seen as overbought while the US dollar also managed to secure a limited correction after heavy selling during Tuesday while commodity currencies edged lower. Coronavirus developments also had some negative impact on the Euro as Spain reported its highest number of new daily infections since lockdown was lifted with an increase of over 3,700.

Underlying dollar sentiment remained weak amid expectations of a sustained decline in yield support, but EUR/USD retreated to just below the 1.1900 level.

Minutes from July’s Federal Reserve policy meeting reinforced the committee’s concerns over the economic outlook, especially given a high degree of uncertainty over coronavirus developments. Overall, there were downside risks to the outlook with a slower pace of recovery in the second half of 2020 even though the committee assumed that further fiscal stimulus would be sanctioned. The lack of fiscal support would risk further economic dislocation in the short term.

Most participants considered that a revised long-term statement of goals could make policy clearer. There were, however, also comments that most members considered yield caps and targets would provide only modest benefits and could spur excessive balance sheet growth.

Overall, the lack of enthusiasm for yield curve control and no clear rhetoric on any shift in inflation goals triggered dollar gains with a sharper correction from recent losses. Commodity currencies retreated sharply and EUR/USD dipped below 1.1850 as dollar short covering intensified.

Euro-zone coronavirus concerns again hampered the Euro with a further increase in infections within Germany with EUR/USD just below 1.1850 on Thursday.

The dollar edged higher ahead of Wednesday’s New York open with a net improvement in sentiment following the USD/JPY rebound from lows just above the 105.00 level. US yields edged lower which limited the scope for a wider recovery with consolidation around 105.70 into the European close.

The cautious stance on the economic outlook within the Federal Reserve unsettled risk appetite.

Equities edged lower which provided an element of yen protection, although USD/JPY moved to the 106.00 area amid wider US currency gains against major currencies.

There were no significant developments surrounding the US fiscal stimulus which also hampered risk appetite and markets remained cautious over US-China trade relations despite some vague comments that trade talks could resume.

Asian equities moved lower and USD/JPY held just above the 106.00 level in early Europe as the yen struggled to secure more than limited defensive support.

Sterling was unable to draw further support from the higher than expected inflation data. There were expectations that the rate would retreat again in August and most investment banks expected the Bank of England would maintain a very expansionary policy over the medium term.

With the dollar able to secure a limited correction, GBP/USD retreated to below 1.3200 at the European close from highs near 1.3270. The UK currency was unable to secure further headway against the Euro as GBP/EUR held around the 1.1050 level.

US dollar developments continued to have a key impact with a wider US currency recovery following the Fed minutes pushing the UK currency down to lows just below 1.3100. Markets will continue to monitor developments surrounding EU-UK trade talks, although global developments may well dominate on Wednesday.

Economic Calendar