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USD drops further on FOMC minutes - BTMU

FXStreet (Łódź) - According to Lee Hardman, FX Analyst at the Bank of Tokyo Mitsubishi UFJ, the dovish FOMC minutes released yesterday dampened Fed rate hike expectations and weighed on the dollar.

Key Quotes

"The US dollar has weakened further in the Asian trading session following the release of the latest FOMC minutes overnight. It appears likely now that the dollar index’s record run of twelve consecutive weekly gains will be brought to an end this week."

"The FOMC minutes proved more dovish than expected revealing that a number of participants noted that US economic growth over the medium-term 'might be lower than they expected if foreign economic growth came in weaker than anticipated, structural productivity continued to increase only slowly, or the recovery in residential construction continued to lag'. 'Some participants also expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the US dollar and have adverse effects on the US external sector', and 'at the same time, a couple of participants pointed out that the appreciation of the dollar might also tend to slow the gradual increase in inflation towards the FOMC’s 2 percent goal'."

"Building concerns amongst FOMC participants’ over negative external risks and a stronger US dollar, both of which have likely heightened further since the last FOMC meeting, has prompted the market to dampen Fed rate hike expectations undermining the US dollar in the near-term. Short-term US yields have almost fully retraced the adjustment higher recorded between mid-August and the end of September while long-term yields are now close to their lowest levels in 2014. The pullback in US yields will help to dampen further US dollar strength in the near-term, and may yet still prompt an even deeper correction lower after such a strong run of gains for the US dollar."

"The other main point of focus in the latest FOMC minutes was participants discussions regarding the Fed’s commitment to maintain low rates for a “considerable period” of time after QE ends. The minutes revealed that the FOMC is keen to revamp its forward guidance but is wary that any change in communication maybe misinterpreted by the market."

"Several participants thought that the current guidance implied raising rates too late, and more worried about 'considerable time' sounding like a commitment. However, a number of officials 'noted that changes to the forward guidance might be misinterpreted as a fundamental shift in the stance of policy that could result in an unintended tightening of financial conditions'. As a result, most participants indicated a preference for 'clarifying the dependence of the current forward guidance on economic data'."

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