*USD drops to a two-week low, markets await Fed meeting tonight
*US equities fell for the first time in six sessions, China takes a breather
*US 10-year bond yields tumbled on sour risk sentiment
USD fell to lows of 92.31 before closing modestly stronger at 92.43, but below last week’s low at 92.50. GBP extended its bounce but couldn’t close above 1.39 and EUR pushed as high as 1.1840. This left EUR/GBP significantly lower and closed at 0.8512 near the July lows at 0.8503. AUD’s move higher struggled to hold amid mixed Australian inflation data (3.8% y/y as expected, 0.8% q/q versus 0.7% expected, core 1.6%).
US equities declined 0.5% led by tech stocks ahead of some big Tech earnings. Apple reported a massive beat, but the stock slid on warnings about chip shortages that could impact sales this quarter. The China rout paused with its main index in the green and rallying into the close. US and European futures are mixed.
Market Thoughts – FOMC non-event?
Markets await the outcome of the two-day Federal Reserve policy meeting which concludes tonight. It is an interim meeting with statement and press conference, so no updated projections or dot plots.
Consensus does not expect any new policy signals. The Fed and Chair Powell are set to repeat that high inflation is mostly transitory so no change in the policy mix is needed. They are also likely to reiterate that the labour market recovery still has further to go with employment levels more than six million lower than before the pandemic. The latest Covid wave adds further uncertainty that can be used to justify inaction.
That said, there is growing hawkishness in the Fed ranks given elevated inflation and the strong economy. Falling bond yields is also a big extra monetary stimulus for the economy and likely add to the uneasiness of the hawks. Taper talk and timelines is essentially what the market is looking for. Any disappointment on this front could see the greenback pushed lower towards the July low near 92 on DXY. Conversely, acknowledgment of persistent inflation will get the hawks excited about more detail, potentially at the Jackson Hole symposium in late August.
Chart of the Day – EUR/USD rangebound
The world’s most traded currency pair is continuing to trade around 1.18. The dollar has been hit by falling real bond yields this week while also benefitting from its safe haven status. The ECB has stuck to its dovish message so the global risk backdrop has been the pair’s main recent driver amid collapsing Chinese stocks and delta waves.
EUR has held off downward pressure from the prior few months with firm support around the mid-1.17s. This could just be bearish consolidation ahead of another leg lower. The longer sideways trading persists, the greater the volatility will be. Initial resistance lies at 1.1830 and then 1.1850. A move above here could signal a more meaningful correction of the losses since May.
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