The FOMC minutes yesterday highlighted three key points for the FX market.
The Fed felt that the appreciation of the dollar was helpful in suppressing import prices and contributing to the Fed's objective of bringing inflation back to its 2% target.
The Fed noted that the dollar had continued to strengthen in the inter-meeting period, especially against the euro.
The Fed acknowledged the risk of tightening more than necessary - a risk that in effect justified slowing the pace of rate hikes and shifting to a more data-dependent approach.
There are still three big event risks ahead of the 21 September FOMC meeting which will help determine whether the Fed hikes 50bp or 75bp. These are the Fed's Jackson Hole symposium (25-27 August), the August jobs report (2 September) and the August CPI data (13 September).
The US data calendar is quiet today but the greenback is likely to remain well supported.
CAD - Canadian Dollar
The US dollar has extended its recovery against the Canadian dollar to reach almost 1.2950, its highest level since August 8. The pair will take its cues today from the S&P 500 and the general risk appetite in the North American session. Yesterday's post-FOMC minutes low near CAD1.2880 may offer reasonable support. Observe the USD/CAD chart.
EUR - Euro
EUR/USD failed to find any positives from yesterday’s FOMC even though US yields softened a little. The unrelenting negatives emerging from the gas crisis no doubt continue to weigh on the euro and suggest EUR/USD may struggle to hold gains over 1.02 today. Fund managers continue to believe the euro is undervalued - but they have been saying that since 2018. And we think the gas crisis and terms of trade shock has driven a lower fundamental value for EUR/USD.
GBP - British Pound
The pound had a wild ride yesterday as a slightly stronger than expected CPI reading triggered a huge 25-30bp upward adjustment in the Bank Rate expectations. UK 10-year Gilt yields rose 16bp yesterday. The GBP briefly rallied on the rise in money market rates but ended the day net weaker. We are more in the camp that BoE rate hikes will likely support the GBP in the months ahead.
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