United States policy makers kept the US benchmark interest rate unchanged at 1.25%, as inflation remained persistently low in the American economy, and far below the Federal Reserve’s (Fed) 2% target level.
The Fed policy statement on Wednesday noted, that inflation has stayed undesirably low even though the job U.S. market keeps strengthening, even with the unemployment rate at just 4.4%. Normally, solid job growth drives up wages and prices, but the Fed’s preferred gauge of inflation has moved further below its target level in recent months.
The Fed decided after ending its latest policy meeting, to leave its key rate unchanged, after having raised rates twice this year in March and June. The Fed says it still envisions further “gradual” rate hikes. But many economists say they foresee no further rate increases this year unless inflation picks up.
The U.S. dollar sold off sharply as markets took the Fed’s wording on inflation as dovish for a future U.S. rate hike. The U.S. dollar index moved to a 13-month low against a broader set of top currencies.
The EURUSD moved to its highest level since January 2015, with the euro eventually finding a price ceiling at $1.1776. The next major technical target for the EURUSD being the 200-week average, at $1.1807, a measure it has not traded above since mid-2014.
The dollar was fast approaching the 200-week barrier on its Canadian counterpart, and had also breached that technically important level against the Australian dollar, with the Aussie climbing to $0.8066 cents.
Earlier in the week, the Australian dollar had fallen to $0.7870 against the US dollar, as Australian inflation figures came in weaker than expected, at 0.2% for the second quarter, far worse than the 0.4% increase expected.
The US dollar also fell back against the Japanese yen, following the Fed policy statement, moving to 110.79, although the damage was somewhat limited by expectations the Bank of Japan would keep its super-easy policies in place longer than most other global central banks.
German business confidence unexpectedly rose in July, the IFO survey showed on Tuesday, hitting the third record high in as many months as Europe’s largest economy powered ahead. The Munich-based IFO economic institute said its business climate index, based on a monthly survey of some 7,000 firms, rose to 116.0 from 115.2 in June reading, compared with a Reuters consensus forecast of 114.9.
The UK economy expanded by 0.3% in the second quarter of 2017, in line with consensus forecasts, as a slump in the pound and a spike in inflation continued to weigh on the United Kingdom economy. The Office for National Statistics, said that growth in the three months up to the end of June was driven by services, which expanded by 0.5% – compared with 0.1% growth in the first quarter of the year.
The British pound initially moved down towards the 1.3000 level after the GDP figure was released. Sterling later moved to its highest level against the greenback since September 2016, following the Federal Reserve’s July monetary policy statement.
U.S durable goods orders unexpectedly rose 6.5% for the month of June, far exceeding forecasts of a 3% monthly increase and easily bettering the previous months reading of 0.8%. The sharp rise in United States Durable goods orders has mainly been attributed to large orders placed for aircraft during the Paris air show.
In the upcoming trading week, we see a number of high impact economic data releases, with the July U.S Nonfarm payrolls jobs report headlining.
At the start of the trading week we have Chinese manufacturing and Eurozone inflation data. As August gets underway, interest rate decisions from the Reserve Bank of Australia and the Bank of England will be released. We also have a number of other key releases from the United States economy, with pending home sales, July ISM manufacturing figures and the July ADP jobs report.