The publication of the Federal Reserve’s latest minutes provided a boost to the US Dollar last week. Whilst risk sentiment had remained fragile and US macroeconomic data had continued to be strong, the greenback had remained on the front foot for much of the preceding week. The market was looking out for whether the minutes of the Federal Reserve’s July meeting would show whether substantial further progress had been made in the eyes of policymakers, paving the way to a taper of monetary stimulus this year. The initial move in the Dollar was to weaken, unwinding some progress made earlier in Wednesday’s trading session. However, by market open on Thursday it was clear that the impression created throughout equity markets was far less comfortable, prompting a belated flight to safety and into the Dollar.
When the minutes were released on Wednesday evening, there were references to progress within the underlying economy. However, in order to justify a reversal in treasury yields which have been trending lower and to provide significant support to the US Dollar, markets would have to have read the words seemingly tattooed on every voting member’s forehead: ‘substantial further progress’. This was not claimed nor suggested within the minutes and the consequence for the open fixed income and FX markets was that tapering will continue to remain out of sight for now. As a result, EURUSD bounced off of its 1.18 price floor that had been tested earlier on in the trading session.
As Asian equity markets opened, however, it became clear that whilst the minutes were not enough to tantalise the fixed income and foreign exchange markets into rewarding USD with strength at the expense of treasury prices, they were enough to spook stocks. A sell-off equity markets in Asia was carried into trading sessions into Europe and for a while the United States, with mining and technology stocks that had by and large been highly favoured by the market taking the hardest hit. The threat of withdrawing monetary support undermined these stock market valuations prompting a flight into cash and, in particular, the US Dollar.
The dollar is on a 9 month high at present whilst emerging market currencies sold off, crowded out by a stronger Dollar and fearful of the implications a stronger greenback could bring to local finances. The already fragile risk sentiment created fresh waves of concern surrounding Covid-19 cases with particular reference to the Delta variant. GBP also sold off, caught up in the market’s de-risking, with GBPEUR hitting August lows.
Discussion and Analysis by Charles Porter