The dollar lost ground on Powell’s comments with the dollar index at 2-week lows.

The Fed statement was close to expectations, but rhetoric from Chair Powell was relatively dovish with no immediate move towards a reduction in asset purchases.

US bond yields edged lower following Powell’s comments. Risk appetite held steady on dovish rhetoric, although Wall Street indices were mixed. Asian bourses strengthened on supportive comments from China.

The dollar lost ground on Powell’s comments with the dollar index at 2-week lows. EUR/USD advanced to just above 1.1850 and held firm on Thursday. The Swiss franc secured further net gains with EUR/CHF at 6-month lows. Sterling held a firm tone with further relief over the coronavirus trends with GBP/USD above 1.3900. Commodity currencies secured significant gains after the Fed statement with notable USD/CAD losses.

The Euro held a firm tone in early Europe on Wednesday, but was unable to extend gains and gradually retreated into early New York. There was a further paring of short dollar positions into the Federal Reserve policy decision while a more defensive tone surrounding risk appetite also helped underpin the US currency. In this environment, EUR/USD retreated back below 1.1800 at the Wall Street open with choppy and indecisive trading ahead of the Fed statement.

The Federal Reserve held interest rates at 0.25% following the latest meeting and made no changes to the asset-purchase programme, both decisions in line with market expectations and by unanimous votes. There were no updated economic and interest rate forecasts at this meeting.

According to the statement, indicators of economic activity and employment have continued to strengthen while areas most affected by the pandemic have improved, but not fully recovered.

Inflation has risen, but this was still seen as largely reflecting transitory factors. The statement noted that the economy has made progress towards the goals and progress will continue to be assessed at forthcoming meetings. There was indecisive trading in immediate response to the statement.

Chair Powell stated that the Fed is prepared to make policy adjustments if the path of inflation is materially and persistently beyond target. He added that progress towards taper targets and speed of taper was discussed at the meeting, while purchases would continue until progress is achieved. He added that the economy is still a long way from making further significant labour advances with the economy a long way from a hike in interest rates.

He was relatively calm over the economic impact of the Delta variant and the dollar dipped lower following Powell’s rhetoric with EUR/USD advancing to near 1.1850. The dollar remained on the defensive in early Europe on Thursday with EUR/USD just above 1.1850 as commodity currencies posted net gains.

Japan recorded a further increase in coronavirus cases to a record pandemic high in the latest data with some calls for the state of emergency to be extended. Although the data maintained a more defensive risk tone which could underpin the yen, underlying confidence in the Japanese currency also declined. Overall, USD/JPY was able to move back above the 110.00 level.

Risk appetite was underpinned later in the day by reports that the US was close to reaching an infrastructure spending deal which could help underpin medium-term growth. Treasuries edged lower in immediate response to the Federal Reserve statement, but the dollar secured only a marginal advance and USD/JPY then retreated to re-test 110.00 amid wider US currency losses while the yen held firm against major currencies.

There was a rebound in Asian equities on Thursday which helped underpin risk conditions, but USD/JPY weakened to around 109.75 with EUR/JPY just above 130.00.

Nationwide reported a 0.5% decline in house prices for July with the annual increase slowing to 10.5% from 13.4% as higher tax rates from the end of June had a significant impact. Markets will continue to monitor the housing sector and labour-market trends.

Sterling maintained a strong tone ahead of the New York open with sentiment again boosted by relative optimism over UK coronavirus trends. GBP/USD was, however, unable to break above the 1.3900 level and gradually lost ground as the US currency recovered ground.

The latest UK data recorded an increase in daily coronavirus cases, although the seven-day average continued to decline while an easing of inward travel restrictions also helped underpin sentiment. GBP/USD pushed above 1.3900 following Fed Chair Powell’s press conference, but edged lower against the Euro. The underlying firm Sterling tone was sustained on Thursday with a GBP/USD advance to 1-month highs around 1.3930 with GBP/EUR holding just above 1.1750.

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