Markets generally on Thursday were still traumatised following the explosion in volatility seen late in the US session on Wednesday. With a series of technical levels breached and a huge dollar decline with the sharpest one-day dip for four years, players had to reassess underlying market dynamics.
The Fed minutes from June’s meeting showed that several members pointed to the cumulative decline in unemployment over the past nine months and were looking for bond purchases to be completed late this year. Other members were more concerned surrounding the low level of inflation and there was a consensus that further improvement in the labour market and evidence of economic acceleration would be needed before any slowing of bond purchases. This slightly more dovish than expected reading started the dollar slide as it suggested a potentially tougher hurdle to any tapering of bond purchases.
Fed chairman Bernanke repeated that a highly accommodative monetary policy will be needed for the foreseeable future while the current unemployment rate overstated the labour-market health. Rates would probably not increase for some time even when the unemployment rate reached 6.5%. The dovish tone from Bernanke, combined with a lack of liquidity, triggered a savage squeeze on long dollar positions and the EUR/USD surged briefly to highs above 1.32.
The latest jobless claims data on Thursday offered no significant dollar support with an increase to 360,000 in the latest reporting week from a revised 344,000 previously which suggests that the labour market might be cooling, although further evidence will be needed.
There were persistent underlying Euro-zone fears with a particular focus on the peripheral economies and political stresses. For now, the Euro impact was limited as markets focussed on US monetary policy. EUR/USD found support on dips to the 1.30 level and consolidated around 1.3050 later in the New York session.
The Bank of Japan left monetary policy on hold at the latest policy meeting and also raised its economic assessment for the seventh successive meeting. USD/JPY did find support below the 98.50 level, but was unable to make any fresh challenge on the 100 level due to wider dollar vulnerability.
The Australian dollar drew some initial support from a stronger than expected employment report, but selling pressure quickly returned as AUD/USD dipped back below the 0.92 level from a peak above 0.93. GBP/USD was buffeted by wider dollar moved and hit a peak close to 1.52 before retreating.