The aftermath

The US dollar took a beating after the Fed meeting yesterday, but has recovered some of the losses Thursday morning. A composite index of the dollar against other major currencies fell to a 14-month low, and euro surged to the high 1.17s against the USD. While we’ve recovered somewhat this morning, it’s important to take a look at how investors interpreted the Fed’s July statement.

Investors were hoping for a signal that the Fed is ready to start trimming their balance sheet, and they followed through. The meeting statement committed to unwinding its balance sheet “relatively soon.” So why is the USD lower?

Subtle changes to the statement from the previous meeting came across more dovish than investors were hoping for. “Relatively soon” is not as committal as “soon”, and the language on inflation was softer than before. The committee noted that both headline and core inflation both declined, and they would “carefully monitor” price trends going forward.

Despite keeping gradual rate hikes in their forecast, some analysts are questioning whether a third hike this year really is being debated within the Fed.

Bloomberg notes that the technical analysis suggests that should the USD close below 1,150 on the dollar index, it may be set to erase all its post-2014 gains.

Durables do little to lift

US durable goods orders rise the most in 3 years.

New orders for US manufactured durable goods jumped 6.5 percent month-over-month in June, chasing up a drop in May and more than doubling analyst expectations of a 3 percent rise.

It is the biggest gain since July of 2014, but one swallow does not a summer make. June’s gains were significantly boosted by a 131.2% surge in orders for civilian aircraft – and we likely have the Paris air show to thank for that.

Core durable goods orders did little to excite in June, but an upward revision for the month prior puts this on the positive side as well. Overall, this did little to impact the dollar, but amidst consistently disappointing US data, we’ll take it.

Libor no more

London will be scrapping the Libor interest rate benchmark.

Libor is the interbank lending rate and has been embroiled in a massive banking scandal.

Andrew Bailey, chief executive of the Financial Conduct Authority or FCA spoke Thursday on the matter, emphasizing the need to work on an alternative index which he hopes will be rolled out by 2021. Libor rates are based on submissions from banks of interest rates they believe they would be charged by others for borrowing money, but it isn’t working. The FCA believes that Libor is unable to fulfil its objective of measuring the price banks pay to borrow from each other because interbank lending has fallen sharply since the financial crisis.

During the 2008 crisis, it was found that Libor was being manipulated by some of the largest global banks. While Bailey said there is no new evidence of wrongdoing, the current situation is unsustainable and needs to be addressed (read more here).

EURUSD: Euro stepping back from yesterday’s Fed-led gains that propelled it into the high 1.17s as investors take stock of what to expect from central banks.

GBPUSD: Sterling wasn’t one of the top movers post-Fed meeting, and as such we’ve not had the dollar-positive correction as seen in other major currency pairs this morning.

AUDUSD: Aussie dollar flat, sustaining gains from yesterday against the greenback

USDCAD: Canadian dollar gave up overnight gains heading into the open of North American trading.

USDJPY: Yen gave up overnight gains, but remains slightly stronger against the greenback post-Fed meeting yesterday.