US Dollar falls following cautious Federal Reserve minutes

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25 May 2017

Written by
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

Foreign exchange markets were unusually calm for a second straight day on Wednesday with investors taking a breather from a hectic few weeks of trading.

D
espite the impressive economic news out of the Eurozone this week, EUR/USD was pinned back below the 1.12 mark against the US Dollar throughout the London session. However, last night’s minutes from the Federal Reserve triggered a renewed sell-off in the Dollar. The FOMC dialled back expectations that it would raise rates soon by claiming it would need to see evidence that the recent slowdown in the US was transitory.

Sterling gave back some of its recent gains on the greenback, with the latest opinion polls ahead of next month’s election suggesting that the race to number 10 could be marginally tighter than earlier polls had suggested. The devastating terrorist attack in Manchester and raising of the terror threat alert in the UK to critical this week has kept the currency under pressure and haltered the Pound’s rally in its tracks.

Rating’s agency Moody’s also downgraded China’s debt rating from A1 to AA3, claiming that it expected to country’s debt situation to worsen and economic growth to slow. While the announcement had little impact on CNY, the effect of the downgrade was felt more keenly in the Australian Dollar which sold-off modestly given its closer trade links with Asia’s largest economy.

Away from the major economies, today’s meeting of OPEC in Vienna is expected to present a significant event risk. A failure to strike an agreement today could see the price of oil tumble and we could see a renewed sell-off in commodity currencies and rally in the Dollar.

Major currencies in detial

GBP

With little to no economic or political news yesterday, the Pound was range bound throughout the London session. We did, however, see a modest increase in the latest consumer inflation expectations survey from Citi/YouGov. Consumers now expect prices to rise to 3.0% over the next 12 months from a previous 2.9% forecast.

GDP data for the first quarter is expected to remain unrevised this morning. Even a positive or negative surprise in the data is unlikely to shift the Pound given its datedness. Campaigning ahead of next month’s General Election is expected to resume today, two days after the terror attack in Manchester.

EUR

This week’s robust economic news out of the Eurozone seems to have provided limited ammunition for traders to pile into the common currency. The ECB has been reluctant to talk up the improvements in the economy and the muted reaction in the Euro this week is likely a reflection of that. Currency traders mostly overlooked comments from Mario Draghi on Wednesday that claimed the macroeconomic situation was improving, although there was still no need to deviate from the currency accommodative monetary policy path.

Trading looks set to be particularly thin in Europe today, with German and French markets closed in mark of Ascension Day. As always in periods of lower liquidity we could see a fairly volatile day of trading should news out of the OPEC meeting shift the markets.

USD

The US Dollar index was little moved yesterday, despite comments from US House Speaker Paul Ryan on the chances of tax reform in the country this year. In an interview with Axios news outlet, Ryan claimed that he was confident Donald Trump’s proposed tax reform would pass this year, and that growth in the order of 3% could be achieved in 2017 if the tax cuts materialise.

Initial jobless claims this afternoon will be the main economic release today, although with political factors dominating trading again we’re unlikely to see traders given it too much attention. FOMC member Brainard, one of the most dovish members on the Federal Reserve’s monetary policy committee, will be speaking this afternoon.

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