Forex Market Review (Asian Session) – Fed’s inflation concern weakens dollar; aussie, kiwi at two-year high

Maja Rakic, XM Investment Research Desk

It was a relatively quiet data day in forex markets prompting traders to dwell over yesterday’s events, namely the Federal Open Market Committee (FOMC) meeting. As a result of the Federal Reserve’s dovish tone, the weakness in the US dollar unfolded, with the dollar index hitting a fresh 13-month low. The Australian and New Zealand dollars jumped to two-year highs as traders sold off the greenback.

The Fed confirmed market anticipations of the federal funds rate remaining at the same target range of 1%-1.25% last night. Also, investors got a nod from the FOMC meeting on the reduction of the Fed’s balance sheet that will start “relatively soon”. However, the change in the US central bank’s tone on inflation, specifically expressing less confidence on the recent weakness in inflation being just temporary, induced a sell-off in the dollar. Dollar/yen slipped below the 111 level during Asian trading but managed to slightly recover to just above the 111 mark as European traders were starting the day. Later in the day, markets will be monitoring monthly orders of durable goods in June, which could impact the dollar significantly.

The Australian and New Zealand dollars hit a two-year high against their US counterpart with the aussie last trading at $0.8039 and the kiwi at $0.7536. The surge in the aussie comes after the currency initially plunged against the greenback on softer than expected inflation data yesterday morning.

The euro continued yesterday’s rally on the back of the soft dollar, hitting a fresh high of $1.1776, a position it last held in January 2015. As the Asian session was about to close, the euro retraced some of its earlier gains and was last broadly flat at 1.1730. At 10.8, the Gfk German Consumer Climate index came in above expectations and the prior month’s value of 10.6. The euro rose on the news, however the gains didn’t last long as the single currency fell soon after.

Sterling continued strengthening against the dollar, with pound/dollar last trading at 1.3141 as the European session was about to start. The uptrend in the pair came despite strong dissatisfaction among Britain’s car producers, as they start to feel the strains of Brexit. The number of cars made in the UK in June fell by almost 14% year-on-year to 136,901. Car manufacturers are seeking more clarity from the UK government on its plans for the sector once the country departs the EU. More than half of the cars exported from the UK go to the EU, while domestic demand for cars has weakened in the first half of the year.

Oil prices rose supported by news that US stockpiles decreased more than expected. At 7.2 million barrels, crude oil inventories fell more than analysts’ forecasts of 2.62 million barrels, the Energy Information Administration (EIA) said yesterday. WTI was last up 0.3% at $48.88 a barrel and Brent was at $51.11.

Gold continued strengthening following yesterday’s jump on the softness in the US dollar. The precious metal was last trading at $1,261.36 an ounce.