Comments from Fed Chair Powell dominated on Thursday with the Fed switching to average inflation targeting and emphasising that employment was now a greater priority.

The dollar declined sharply before rallying and eventually posting net losses amid expectations that rates would remain extremely low for longer. The yen was supported by the resignation of Japanese Prime Minister Abe. EUR/USD settled above 1.1850 amid wider US losses.

Sterling was also subjected to choppy trading with a firm underlying tone and GBP/USD traded above 1.3250. Commodity currencies rallied strongly and, after a slide, secured fresh gains on Friday with AUD/USD at 19-month highs.

Euro-zone money supply growth strengthened to 10.2% in the year to July from 9.2% previously and the strongest rate of growth since April 2008.

Reservations over Euro-zone coronavirus developments had little impact despite a 4-month high in French cases. Narrow ranges prevailed ahead of the New York open with inevitable caution ahead of comments from Fed Chair Powell. The dollar edged higher, although movement was limited with some EUR/USD support below 1.1800.

US initial jobless claims increased slightly to 1.01mn in the latest week from 1.10mn and fractionally above consensus forecasts. Continuing claims declined to 14.53mn from 14.76mn, although above market expectations. Second-quarter GDP data was revised to a contraction of 31.7% from 32.9% and slightly stronger than forecasts.

The principal focus was on Fed Chair Powell’s speech to the Jackson Hole symposium as he outlined the new policy framework.

Powell confirmed that the central bank would adjust the inflation target to an average of 2% with employment given a greater importance in achieving goals. The central bank is now more confident that higher employment will not lead to higher inflation and the economy will be allowed potentially to run at a faster rate in an attempt to boost long-term employment. The implication is inevitably that interest rates will remain at very low levels for a longer period and potentially undermine the dollar, although details were sketchy. Markets will be looking for further details in September. There were no comments on yield-curve control or negative interest rates.

The dollar dipped sharply on the announcement with EUR/USD strengthening to 1.1900. There was then a sharp turnaround with the dollar gaining ground, but dollar selling interest on rallies with EUR/USD settling near 1.1820. The dollar weakened again on Friday amid expectations of long-term losses with EUR/USD around 1.1870.

The dollar was held in tight ranges ahead of the New York open. The US dollar dipped after the comments from Fed Chair Powell with USD/JPY lows around 105.60 as US yields moved lower. There was, however, a reversal in Treasuries as the 10-year yield moved higher on expectations that inflation would move higher over the medium term. Higher yields were significant in triggering a dollar recovery with USD/JPY recovering to highs around 106.50.

In his acceptance speech, President Trump threatened to end the reliance on China once and for all and political tensions will inevitably be a key feature during the campaign. House Speaker Pelosi stated that the Democrats were willing to compromise with a $2.2trn stimulus bill, but no evidence that talks were making headway.

Risk appetite was underpinned by approval for a low-cost Antigen coronavirus test with US futures posting gains, although Asian markets were mixed. USD/JPY strengthened to highs near 107.00 as 10-year yields hit 2-month highs and demand for the yen initially remained weak, but the wider US losses pulled the dollar lower. Japanese Prime Minister Abe confirmed that he would resign which supported the yen amid expectations of a less aggressive Bank of Japan monetary policy and USD/JPY dipped to 106.25 as EUR/JPY pared gains.

Following the resignation of EU trade commissioner Hogan, the EU commission announced that Dombrovskis would take temporary charge of the portfolio. Markets continued to monitor trade rhetoric, but global moves dominated with GBP/USD initially moving sharply higher following Fed Chair Powell’s speech, briefly hitting a 2020 high just above 1.3280.

There was a sharp reversal with lows around 1.3160 before consolidation above 1.3200. The UK currency maintained a firm overall tone with GBP/EUR hitting 5-week highs near 1.1200 before a correction. Comments from Bank of England Governor Bailey will be watched closely on Friday.

Media reports suggested that EU has warned Prime Minister Johnson that he had less than two weeks to save post-Brexit trade and security talks. Political pressure will intensify as the summer holiday season ends. According to reports, EU chief negotiator Barnier and UK counterpart Frost will hold emergency talks next week. The Lloyds business barometer recovered to -14 for August from -22 previously, the largest monthly improvement for 3 years. Sterling held a strong tone on Friday and GBP/USD traded around 1.3270 against the vulnerable dollar.

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