Monex: Tapering on agenda according to Fed

Monex: Tapering on agenda according to Fed

19 augustus 2021

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The EURUSD has hit a nine-month low. Below is a short commentary in English by Ima Sammani, Currency Analyst at Monex Europe on the US dollar, the euro and the British pound.

EUR

EURUSD was locked into a battle as it tried to defend a strong support level during the latter stages of the European trading session yesterday, until falling Treasury yields helped the single currency rise from fresh 9-month lows.

However, this morning, with risk sentiment still in tatters, the single currency has broken through the support level to plumb fresh lows against the dollar as it trades at levels not seen since November 2020.

With very little on the data calendar, the focus for EURUSD will be on how the broad US dollar trades as markets adjust to the idea of actual Fed tapering this year.

USD

The past few sessions have all been about the broad US dollar, and yesterday wasn’t any different. With the release of the latest FOMC meeting minutes, dollar gyrations drove volatility in FX markets.

While Fed officials said in July’s meeting that the conditions for tapering haven’t been met yet, some officials signalled that the tapering of their QE programme could commence as early as this year.

While this isn’t news to anyone watching the Fed, as this sentiment has been relayed throughout the past 4 weeks in press conferences and speeches, markets initially viewed it as more dovish than they expected as it didn’t tee up a formal tapering announcement at Jackson Hole on Friday of next week.

The initial drop in Treasury yields, specifically at the back end of the curve, promoted a rally in G10 currencies against the dollar, with EURUSD rising from recent 9-month lows.

However, despite US Treasury yields declining again today, European markets have awoken to a bout of US dollar strength that began in the Asian trading session as traders look towards the larger FOMC consensus calling for tapering to begin this year should the progress in the labour market hold up.

With Fed tapering being such a pivotal event for global markets, and speculation as to when it will occur elevated, any piece of minor US data is likely to drive market volatility between now and Jackson Hole next week. On the data calendar today is initial jobless claims and the Philadelphia Fed Business Outlook results for August, which could do just that.

GBP

The pound was little impacted in yesterday’s trading session relative to other G10 currencies, but joins the broader move in tanking against the US dollar as markets assess the fallout from yesterday’s FOMC meeting minutes.

The pound sits in the middle of the G10 currency pack today as it drives lower against the dollar, with little idiosyncratic drivers coming from the UK data calendar ahead of tomorrow’s release of July’s retail sales data.

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