Wednesday’s Fed minutes were broadly in line with expectations as the FOMC remained more optimistic surrounding the economic outlook. There were expectations that the bond-purchases programme would end at the October meeting with a final US$15bn cut, but there were no major hawkish elements with commitment to an accommodative policy.
Even though St Louis Fed President Bullard stated that inflation was likely to overshoot next year and that interest rates were likely to rise earlier than markets expected, the comments also failed to provide a dollar lift as EUR/USD pushed towards the 1.3650 area.
The latest Australian labour-market data provoked a significant move after a muted reaction to the Chinese trade data. Although employment increased overall, there was a decline in full-time jobs and the unemployment rate ticked higher to 6.0% from 5.9%. After a brief spike towards 0.9450, there was a slide back below 0.9400 for AUD/USD as risk conditions remained cautious. A sharp decline in Japanese core machinery orders unsettled markets and equity markets remained in defensive mood.
Confidence in the Euro-zone outlook deteriorated in Europe following a much weaker than expected 1.7% decline in French industrial production for May and this was followed by a sharp 1.2% drop in Italian output for the month. French annual inflation also dipped to 0.5% for June, maintaining fears surrounding the French outlook and EUR/USD moved back towards 1.3600 during the European session.
There was a further sharp increase in Portuguese benchmark bond yields during the day on fears surrounding Banco Espirito Santo and there was a significant wider impact on peripheral bond markets. In this context, there was renewed demand for benchmark German bonds with yields moving to near record lows. As well as curbing Euro demand, there was a sharp pick-up in yen buying as equity markets dipped sharply. USD/JPY dipped to lows near 101.00 while EUR/JPY dipped below 138.00
There was no surprise from the Bank of England with interest rates left on hold at 0.50% despite expectations that there would soon be a vote split within the MPC. Sterling was unsettled slightly by the generally defensive tone towards risk appetite and GBP/USD dipped towards 1.7100 before finding support.
Although, US jobless claims data was better than expected with a decline to 304,000 from 315,000, there was no major market impact with risk conditions tending to dominate and US Treasury bond yields being pushed lower by safe-haven demand. After being strangled by another large 1.3600 option position EUR/USD dipped lower through this level once it had expired.