USD

The dollar recouped its losses to trade close to multi-month highs yesterday as investor demand increased in anticipation of June’s US Federal Reserve minutes.

It was June’s meeting which saw interest rate hike expectations brought forward and there is now talk of two hikes in 2023. These originally weren’t expected until 2024. Since then, the dollar has been well supported as investors place bets the US central bank will be the first to taper monetary policy and normalise interest rates post Covid-19.

Once the minutes were actually released, the dollar was relatively unmoved. There were no real surprises as the minutes ultimately confirmed expectations the US central bank is moving towards tapering its asset purchases this year.

Various participants of the meeting felt conditions for reducing asset purchases would be met somewhat earlier than expected, with a substantial majority feeling inflation risks were tilted to the upside and that it would be necessary to act if those risks materialised.

Having said that, the minutes also showed not every participant is on board with adjusting policy right away. Some participants remain cautious on reopening the economy after the pandemic left an unusual level of uncertainty. It would seem a shift in monetary policy is still very much data dependant.

The minutes also showed that Fed Chair Jerome Powell echoed this uncertainty. He stated job creation was still “a ways away” from the progress the Fed wants to see before tapering. The latest non-farm payrolls showed the US added 850,000 jobs in June. If this pace of hiring continues over the next few months the Fed may be forced to accelerate their tapering timeline.

Key announcements

12:00 – EUR – Special Strategy meeting

13:30 – EUR – ECB president Lagarde Speech