The Dollar trade-weighted index was broadly stable on Monday-Tuesday but weakened slightly in the wake of the Federal Reserve’s policy meeting on Wednesday, at which it left its policy rate unchanged as expected, and Chairperson Powell’ press conference. The Dollar weakened further in the latter part of the week to end down 0.6% and is currently about 0.8% weaker than on 20th July when it hit a 15-week high. The S&P 500 was choppy around the 4,400 mark and closed down 0.4% on the week.
The Federal Reserve statement was moderately less dovish than at its June meeting, noting that “with progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen […]. Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain”. Importantly the Fed concluded that since December the economy had made progress towards toward its maximum employment and price stability goals.
However, Powell in his press conference warned that the US economy was some way away from having had substantial further progress toward the maximum employment goal and remained vague as to the Fed’s potential timeline to start tapering its asset purchases. Markets will be paying close attention to labour market data releases in coming months.
The US rates curve bear flattened in the wake of the Fed meeting with 2-year Treasury yields edging higher and long-end yields falling slightly. However, 2-year yields dropped to a fortnightly low below 0.19% on Friday following the release of data showing that core PCE-inflation (the Fed’s preferred inflation measure) had risen only incrementally in June (and by less than expected) to 3.5% yoy from 3.4% yoy in May. Headline PCE-inflation was unchanged at 4.0% yoy.
Other US macro data were mixed. GDP rose by a weaker-than-expected 6.5%qoq (annualised) in Q2, following 6.3% growth in Q1, due to a loss of momentum in June. Durable goods orders growth slowed sharply to 0.8% mom (from 3.4% mom in May) while the merchandise trade deficit widened further. However, consumer confidence in July confounded expectations with the Conference Board index rising for the seventh consecutive month to a 17-month high of 129.1.
Sterling and the Swiss Franc outperformed last week, appreciating respectively 0.5% and 0.8% in trade-weighted terms, while the Euro gained only 0.2%. The EUR/USD cross showed minimal reaction to the release on Friday of data showing that Eurozone CPI-inflation had risen faster than expected in July (based on preliminary figures) to 2.2% yoy and that GDP growth of 2.0% qoq in Q2 had exceeded expectations of 1.5% qoq. The GBP/EUR cross has been trading above 1.17 since 27th July, although it has edged lower since hitting a 2-week high of 1.176 on 28-29 July.
The Australian Dollar was one of the biggest under-performers last week among major currencies, with the currency shedding 0.7%. Markets are seemingly concerned that the Reserve Bank of Australia will announce at its policy meeting on 3rd August a reversal in its decision to start tapering its QE program in September. The RBA had announced in July that it would cut its weekly asset purchases to AUD 4bn from AUD 5bn.
