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  • The dollar rallied around 0.80% in the DXY following less dovish Fed.  
  • EUR/USD sinks to a year’s low and set to go lower on ECB/Fed divergence.  

Forex today was a whitewash for the Euro considering the data releases that will only make the case for the ECB to pull the trigger more comfortable for committee members in the face of an economic crisis  – And then along came the Fed, screwing down the coffin for the single unit which plunged to the lowest levels since…hold on, let’s pull up the daily chart… June 2017.  

Firstly, the latest flurry of EZ data was to be expected, in tune with recent PMIs from a fragile economy that is relying on its services sector. There was a downside 0.1% miss in core CPI and given the ECB’s focus on underlying inflation and inflation expectations, the case is indeed clearer for an additional round of stimulus in September. Q2 GDP data for Spain, Italy and the Eurozone, as well as July inflation for France, Italy, and the Eurozone came out as well. All in all the data was a little underwhelming. EZ GDP came in line with consensus at 0.2% q/q although though headline CPI met expectations at 1.1% y/y.

Meanwhile, markets were sitting tight for the Federal Reserve that did as what was expected, cut its policy rate by 25bp and left the door open for more. however, there was no real dovish bias in the statement that was virtually unchanged from that of June’s and instead, it was seen, and told by Powell, to be an insurance cut rather than the beginning of an easing cycle. This sent the Dollar on a tear, of which it is still in today, rising again in Tokyo at the time of writing.  

Markets are price 60% chance of a 25bp cut in Sep

The DXY has rallied around 0.80% since the announcements and Powell’s presser. As for yields, analysts at Westpac noted that “US 2-year treasury yields jumped from 1.81% to 1.96% in response to the Fed outcome, steadying around 1.87%. The 10-year yield, which had earlier declined from 2.06% to 2.02% after some lukewarm data, jumped to 2.07% in response to the Fed, but closed at 2.01%. Markets are pricing 15bp of easing (or a 60% chance of a 25bp cut) at the 19 September meeting, and a terminal rate of 1.45% (implying 70bp further easing expected in total).”

FX price action

Indeed, markets were the position for a more dovish outcome and the price action in the FX space happened as follows:  

  • “The US dollar rose against all G10 currencies on the Fed headlines.
  • EUR/USD fell from 1.1160 to 1.1065 – a two-year low. USD/JPY rose from 108.50 to 109.00 – a two-month high – but then eased back to 108.75 as the yen found some safe-haven demand from weak equities.
  • GBP/USD had rallied to 1.2250 before the FOMC, then slid back to 1.2160, flat over the day.
  • AUD/USD fell from 0.6890 to 0.6832 – matching the 18 June low.
  • NZD/USD fell from 0.6610 to 0.6543 – a six-week low.
  • AUD/NZD mostly sustained yesterday’s gains, inspired by weak NZ business confidence data and solid AU CPI data, trading around 1.0440,”

analysts at Westpac explained.

Key notes from Wall Street:  

  • Wall Street reverses course on Powell remarks, S&P 500 erases more than 1.5%

Key events in Asia:  

China Jul Caixin manufacturing PMI is released –    49.5 expected following yesterday’s 49.7 in the official survey.