The Federal Reserve made no policy changes. It remained committed to a very accommodative policy and Chair Powell warned that the economic recovery had slowed.

The Federal Reserve made no policy changes. It remained committed to a very accommodative policy and Chair Powell warned that the economic recovery had slowed. The dollar remained on the defensive with the currency index sliding to fresh 2-year lows before a limited recovery on Thursday amid reservations over coronavirus developments.

EUR/USD tested fresh 22-month highs in the 1.18 area before correcting. Risk appetite was hampered by coronavirus concerns and uncertainty over US fiscal policy.

Sterling held firm with GBP/USD testing fresh 4-month highs in the 1.3000 area before correcting. Commodity currencies drew limited support from US dollar weakness, but underlying support was limited with fresh selling on Thursday.

The US goods trade deficit declined to $70.6bn for June from $75.3bn previously as exports recovered at a stronger pace than imports. Pending home sales increased 16.6% for June, above expectations of 15.0%. Overall, the dollar lost ground after US markets opened, although moves were driven primarily by gains in the Euro as commodity currencies were unable to make significant headway. The single currency gained fresh support and EUR/USD strengthened to near 1.1780 at the European close.

The Fed maintained the Fed Funds rate in the 0.00-0.25% range, in line with consensus forecasts and with a unanimous vote. According to the statement, economic activity and employment had picked up somewhat in recent months, but remained well below levels at the beginning of the year.  The public health crisis will weigh heavily on economic activity employment and inflation in the short term and also poses a considerable threat to the medium-term outlook.

The central, therefore, remains committed to using its full range of tools to support the economy and meeting its goals. It expects to maintain the Fed Funds rate at current levels until it is confident the economy has weathered recent events. There was no mention of yield-curve control in the statement.

Chair Powell stated that the evidence suggested that the pace of economic recovery had slowed since June and the pandemic is a disinflationary shock. He added that there is clearly a risk of a slowdown in the rate of growth and the labour market has a long way to go to recover. He reiterated that the bank is not thinking of raising interest rates.

The dollar gained briefly, but overall remained on the defensive with EUR/USD testing the 1.1800 area. There was selling interest in this area with EUR/USD edging lower to 1.1760 on Thursday as the dollar corrected slightly from 2-year lows, although overall US sentiment remained negative.

The dollar remained under pressure ahead of the New York open and USD/JPY dipped to fresh 4-month lows near 104.80 before stabilising. There was support at lower levels with the US currency consolidating around 105.00, especially with reservations over the potential for verbal intervention from the Japanese Finance Ministry.

The Federal Reserve announced that swap lines with central banks would be kept open until March 31st next year, maintaining strong liquidity provisions for overseas central banks. Bond purchases will be maintained at least at the current pace and heavy overnight repo operations will continue.

Coronavirus concerns continued with California, Texas and Florida reporting 1-day records for fatalities, although the number of new cases slowed slightly.

US equities held gains and, although the dollar briefly spiked higher, USD/JPY settled around 105.00 as the lack of yield support undermined fundamental backing.

There was further uncertainty over US fiscal policy with Republican Senate leader McConnell stating that he hopes to reach a deal on unemployment benefits by Friday, but there were still internal party divisions. There were further concerns over coronavirus developments in Tokyo, but retail sales data beat expectations with a 1.2% decline in the year to June after a 12.5% decline the previous month. USD/JPY found some support below 105.00 and secured a limited recovery to 105.25.

UK mortgage approvals increased sharply to 40,000 for June from 9,300 the previous month and above consensus forecasts of 34,000 as the economy bounced back after the easing of lockdown measures in the housing sector. There was a further repayment of consumer debt during the month, although there was a substantial decline from May’s level sand overall consumer lending posted a £1.8bn increase on the month following May’s £4.5bn contraction.

The data provided an element of Sterling support, although moves were dominated by global flows and further evidence of month-end positioning. GBP/USD advanced to fresh 4-month highs just below 1.3000 while GBP/EUR rallied to 1-week highs above 1.1067 before a pullback to 1.1003 as the Euro gained fresh support. GBP/USD probed resistance above 1.3000 following the Fed statement.

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