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From the Floor: Dovish FOMC keeps USD on the defensive

  • • Dovish July FOMC minutes soften the USD
  • • FOMC split between between hike advocates and more cautious members
  • • EURUSD dipped on report that Draghi will not deliver any news at Jackson Hole
  • • Today's ECB meeting minutes unlikely to produce much of interest: Hardy
  • • Gold is headed back up for a test of key resistance at $1,300/oz: Hansen
  • • Bullish drawdown of crude oil stocks failed to boost oil prices
  • • Industrial metals 'on fire'
Saxo Strats banner
By John Acher

Dovishness in the Federal Open Market Committee's record of its July meeting dented the US dollar, and gold is climbing towards a test of key resistance partly on stranger and stranger developments surrounding the presidency of Donald Trump in Washington, the Saxo strategy team says.

The July FOMC engaged in a discussion of inflation, and the minutes showed a split between advocates of further tightening and more cautious members.

“The market had largely priced in that the FOMC minutes weren’t going to bring anything,” says Saxo Bank's FX strategy chief John J Hardy. 

“Luckily for the Fed, they have set up the September [FOMC] meeting as the one where they start to do a small adjustment to the balance sheet, and that gives them four more months of inflation data before they have to decide on that December rate hike," he says.

The market is pricing the chances of a December US rate increase at only about 50-50, and there was only about a 1-basis-point move in expectations on the minutes, Hardy says.

The European Central Bank is scheduled to publish the minutes of its latest meeting today, and Hardy says he does not expect that to provide much of interest.

EURUSD dipped on a Reuters report on Wednesday that ECB president Mario Draghi would not deliver any new policy message in his August 25 speech to the Fed's Jackson Hole conference.

But the dollar slipped and EURUSD rose by 20 pips after the dovish FOMC minutes.

Gold prices rose on Wednesday, partly on "more and more strange" developments in Washington, but also on the softer dollar and expectations of low US interest rates for longer, says Saxo Bank's head of commodities strategy Ole Hansen.

Trump has been sharply criticised this week, including by Republicans and prominent business leaders, for his attitude towards a violent rally by neo-Nazis and white supremacists in Virginia at the weekend.

The $1,295-1,300/oz level is key for gold, and a rise above that could trigger additional fund buying of the precious metal, says Hansen.

A bullish drawdown in US crude oil inventories failed to invigorate oil prices as the market chose to focus instead on rising US production, increasing imports from the Middle East and an expected slowdown in gasoline demand as the US driving season ends, says Hansen.

“The market didn’t like that, and the market sold off,” he says.

The focus is on $50/barrel for Brent crude today, says Hansen, adding that a large long position in oil held by funds — the highest since April — is now an important driver in the oil market.

Meanwhile, industrial metals are "on fire," with aluminum at a six-year high, zinc hitting a 10-year high on ore shortage, and high-grade copper also gaining, Hansen says.

 The minutes of the July FOMC kept the US dollar on the back foot. Image: Shutterstock

John Acher is a consulting editor at TradingFloor


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