Trading Currencies: ‘All Talk No Action’

Back to Core

Very mixed week for FX. So, in times like these we say go back to basics and base currencies, with the king of them all being the USD.

The basics are following the Federal Reserve and the US Data – let’s examine that with the release of the Fed’s Minutes from the July meeting. Read the latest news updates.

Key Takeaways from the Fed’s Minutes

The minutes, released on Wednesday (Aug 18), indicate that tapering might begin before the end of 2021. Other than that, Fed officials have not reached any consensus over the exact timeline or the economic outlook.

• Tapering discussed, no decisions made, we note these lines: “Participants agreed that their discussion at this meeting would be helpful background for the Committee’s future decisions…No decisions regarding future adjustments to asset purchases were made at this meeting.”
• On the structure of the QE program, “most” saw benefits of trimming the pace “proportionally in order to end both sets of purchases at the same time” (by this it means treasures and mortgage-back securities). But “several” suggested tapering is more appropriate next year due to “prevailing conditions in the labour market”.
• The economic view: “All participants” agree the economy had made progress. “Most” believe that the Committee’s “substantial further progress” of maximum-employment had not yet been met. That very wordy statement basically means that the US is not at pre-COVID levels.
• Inflation mandate, this is where the highest level of debate is taking place. It is clear that some believe the inflation goal had been met and is becoming structural. However, the main view around inflation is the “transitory nature of this year’s rise in inflation, as well as the recent declines in longer-term yields and in market-based measures of inflation compensation” i.e., it will ease due to transitory effects.

Fed’s Hawkish Comments

St. Louis President James Bullard continues his hawkish stance stated last week he would “prefer tapering to end by Q1 2022”. His reasoning for going this hard is it “would give the Fed more flexibility to deal with inflation” as he fears there is “more inflation than we care to admit.” He followed this up with his thought on rate hikes stating: “Q4 2022 was a logical time.”

Mixed Market Reaction

The base conclusion from the market over the week is the USD still holds the ascendency, but it is mixed.

EUR/USD hit $1.1694 last week, which is its first sub-$1.17 since November. It has recouped this level but RSI and momentum in the pair is to the downside.

GBP/USD too was weaker through the week. It was volatile around the Minutes but at $1.375 it’s a long way from the strength it had in the early part of the year, and it too has technical suggesting further weakness.

USD/JPY is one of the only pairs the USD is flat in as risk-off trading sees investors moving to the JPY. The pair got to ¥110.00 but is back in the ¥109s at ¥109.75 and is stuck in a range.

AUD/USD fell to $0.7229 last week, which is a nine-month low – it has recouped slightly but it is fighting two issues, USD positive news and negative AUD news. Iron ore is now in a bear market and falling fast. Over 12 million Australian are in lockdown and the economic recovery of last year is quickly evaporating. Get the latest update here.

Upcoming event that may affect the trend of USD:

• Aug 27 (Fri) 9:00am CDT – Speech by Fed Chair Jerome Powell at the Jackson Hole Economic Policy Symposium

This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.