James Chen

Market action this past week was dominated early in the week by mixed expectations regarding the Fed’s monetary policy stance ahead of Wednesday’s release of July’s FOMC minutes, and then by even more mixed opinions and conflicted speculation after the release. The Fed’s policy talk worsened the confusion throughout the week – from the highly-dissected public statements by key Fed members to the actual release of the FOMC minutes.

EUR/USD has been climbing from its post-Brexit lows for nearly the past month. Much of this rise has been attributed to weakness in the US dollar, as bets on a Fed rate hike this year have progressively diminished in recent weeks. Wednesday’s release of July’s FOMC minutes failed to help matters much for the US dollar, as the Fed was seen as sharply divided in opinion and unlikely as a whole to raise interest rates in the near future.

USD/JPY continued on Thursday to consolidate its recent losses and fluctuate in a tight range right around the key 100.00 psychological support level. Mixed signals from Wednesday’s release of July’s FOMC meeting minutes that highlighted a divided Fed have contributed to a rather indeterminate directional bias for the currency pair. Despite those mixed signals, however, markets have appeared to make the tentative conclusion that a Fed rate hike is not imminent and that this year may not see any Fed movement at all. This view has been manifested in the US dollar, which continues to fall, as gold remains supported and US equities trade near recent record highs.

At first glance, Wednesday’s release of minutes from July’s FOMC meeting appeared slightly hawkish and relatively more optimistic about the prospects of a Fed rate hike this year. The minutes stated that some Fed members “anticipated that economic conditions would soon warrant taking another step in removing policy accommodation.” This revelation gave some inkling that the Fed may at least be more divided when it comes to members’ opinions on near-term rate hikes, and perhaps not as dovish-leaning as it has been portrayed to be in the past few months. Also on the hawkish side was the assertion that “near-term risks to the economic outlook have diminished.”

Crude oil prices, including both the US West Texas Intermediate and international Brent crude benchmarks, continued to surge sharply on Tuesday, extending the recent two-week rebound and recovery. In the process of this rise, prices have also broken out further above the short-term downtrend that had been in place for more than two months, since the early June highs.

The US dollar dropped sharply overnight after a paper was released detailing San Francisco Fed President John Williams’ dovish-leaning assertions that appeared to oppose a near-term Fed rate hike. On Tuesday morning, however, New York Fed President William Dudley made seemingly conflicting assertions in a televised interview, stating that a rate hike at the Fed’s next policy meeting in September “is possible.” Dudley went on further to state his opinion that the US economy is in “OK shape” and that inflation is “drifting up a little bit.” Dudley’s comments led to a partial rebound for the dollar.

Preliminary Japanese GDP data (q/q) for the second quarter was released prior to Monday’s Asian trading session, and the results were a significant disappointment. Gross domestic product for the April-to-June period was reportedly flat against prior consensus expectations of a 0.2% increase. This weak economic data could likely help pressure Prime Minister Shinzo Abe’s government and the Bank of Japan to find additional ways to stimulate the Japanese economy.

The Bank of England’s interest rate cut to a new record low of 0.25%, and other stimulus measures implemented by the UK central bank last week in response to June’s Brexit decision, prompted even more pressure on sterling than had already plagued the struggling currency.

USD/CAD dropped to a major support level around the psychologically significant 1.3000 level on Thursday as the US dollar remained stagnant and crude oil made a strong rebound, boosting the oil-linked Canadian dollar.

Despite the fact that the Reserve Bank of Australia (RBA) lowered its cash rate by 25 basis points last week to a new record low of 1.50%, as was widely expected, the Australian dollar has continued to show persistent strength within a sharp uptrend that has been in place since late May.

The US dollar remained buoyant on Monday, extending its climb from late last week after a significantly better-than-expected US employment report boosted both the dollar and the possibility of a Fed rate hike this year.

The US non-farm payrolls (NFP) data released on Friday morning showed another big beat for July following June’s stellar outcome. 255,000 jobs were added in July against prior consensus expectations of 180,000. Average hourly earnings were also better than expected, rising by 0.3% versus the previous 0.2% forecast. The unemployment rate remained steady from last month at 4.9%, falling slightly short of the 4.8% forecast. Further, June’s already-buoyant 287,000 figure was revised even higher to 292,000, and May’s painfully disappointing 11,000 was re-revised up to 24,000.

The past two Non-Farm Payrolls (NFP) employment reports both showed exceedingly large deviations from prior consensus forecasts – but in opposite directions. May’s data, released in early June, showed a colossally disappointing 38,000 jobs added in May against prior expectations of 160,000. This was later revised even further down to a minuscule 11,000 jobs added. In sharp contrast, June’s numbers, released early last month, revealed an exceptionally positive 287,000 additional jobs versus prior expectations of 175,000.

Thursday brings the highly anticipated rate decision and monetary policy summary from the Bank of England (BoE), the second such decision from the central bank after the historic EU referendum in late June that resulted in the UK voting to leave the EU (Brexit).

USD/JPY resumed its plunge on Tuesday as the dollar continued its recent slide on lowered Fed rate hike expectations and the yen rose despite news that the Japanese government had approved a hefty fiscal stimulus package worth 13.5 trillion yen.

Despite some key Australian news and economic data releases on Tuesday that should have placed increased pressure on the Australian dollar, AUD/USD climbed significantly. This was due in part to the fact that some of this news had already been expected and priced-in, as well as the overriding weakness in the US dollar.

Crude oil prices continued to fall precipitously on Monday, with the West Texas Intermediate (WTI) benchmark for US crude dropping below $40 per barrel for the first time in more than three months. Monday’s fall extends the sharp downtrend that has been in place since the $51-area highs of June.

The past week has seen heightened market volatility surrounding monetary policy decisions from major central banks, along with a deluge of company results in the thick of earnings season. The US Federal Reserve and Bank of Japan both moved markets this past week with their policy statements, and more loom ahead with the Reserve Bank of Australia and Bank of England providing their own rate decisions and statements next week.

The Bank of England (BoE), European Central Bank (ECB) and most recently, the US Federal Reserve, have all issued their most recent monetary policy statements in the past two weeks. All of these three major central banks opted for inaction – the BoE and ECB refrained from implementing post-Brexit stimulus measures for the time being while the Fed again deferred a long-postponed rate hike. Friday finally brings the Bank of Japan’s (BoJ) highly-anticipated policy statement, which will most likely buck this recent trend of inaction.

In the immediate aftermath of Wednesday’s FOMC statement, in which the Fed held rates steady as expected while still acknowledging improved economic conditions, gold spiked down on the mildly hawkish elements of the statement. Shortly after, however, as the markets digested the Fed’s characteristically non-committal comments that gave no indication as to the potential timing of a future rate hike, the precious metal surged on the continued interest rate uncertainty.

As widely expected, the Fed opted once again to refrain from raising interest rates after its two-day meeting concluded on Wednesday afternoon. And as usual, market-watchers dug feverishly into the policy statement searching for any clues as to potential guidance on future rate hikes, but were again largely disappointed despite the fact that the Fed did acknowledge some economic improvement.

EUR/USD has been trading in a relatively tight consolidation for the past month since the immediate aftermath of June’s Brexit vote, when the currency pair plunged sharply below a large parallel uptrend channel. That plunge brought EUR/USD back down to establish a key support zone around the 1.0900-1.0950 area. This support zone is technically significant in that it is also around the 61.8% Fibonacci retracement of the entire uptrend within the parallel channel, from December’s 1.0500-area low up to May’s 1.1600-area high.

AUD/USD rebounded on Tuesday ahead of critical Australian inflation data scheduled for Wednesday morning in Australia, as well as the highly-anticipated FOMC rate decision out of the US on Wednesday afternoon.