Powell’s dovish message weighs on the dollar, US Q2 GDP in focus this afternoon

GBP

The pound has rallied to a one-month high and crosses its 100-day moving average against the dollar this morning. Risk sentiment is better supported in markets today after news broke that the Chinese regulator met with major investment banks last night to try and soothe equity market volatility after the tightening of regulations on certain sectors. On top of this, a dovish sounding Jerome Powell trimmed expectations that the announcement of the QE tapering timeline is imminent when speaking with journalists last night. The dovish Q&A came after the press statement which saw a change of wording and hinted to markets that progress towards the requirements needed for tapering had been made. Jerome Powell's dialling back of expectations weighed on the dollar, allowing the pound to post gains of 0.16% yesterday, while GBPUSD continues to trade higher this morning with returns in excess of 0.3% at the time of writing.

EUR

The reaction to yesterday's Federal Open Market Committee meeting was a dip in EURUSD initially and a higher EURUSD after the press conference, as the slight change to the statement was offset by Fed Chair Jerome Powell in the press conference when he undermined expectations of a rate hike. This morning, the pair continued to edge up ahead of the Spanish and German CPI releases at 08:00 and 13:00 BST. The Spanish prints came in close to expectations, with the MoM reading falling 0.7% vs the consensus of 0.6% while the yearly figure rose by 2.9% vs the 2.7% expected. The figures will paint a picture of what the overall eurozone inflation print will look like tomorrow. Early morning comments from European Central Bank Executive Board member Panetta reaffirmed the idea that inflation of 1.4% or 1.5% is 'not enough' for the central bank, underscoring the broader belief that risks of high inflation are limited and promoting the recently outlined need for continued monetary support to reach the symmetrical inflation target.

USD

The importance of yesterday's Fed meeting increased as it drew closer. With markets concerned over the impact of the Delta variant on growth, the US 10-year declining to lows of 1.2%, and speculation of the Fed normalising policy in the near future, markets awaited the latest assessment from Chair Powell to guide their next steps. The meeting as a whole didn't disappoint on this front. While the press statement changed the language over the recovery and how far away it was from reaching the requirements needed to taper QE, from 'substantial progress' to 'progress', the hawkish ramifications of the change in wording were soon walked back once Chair Powell began the press conference. The head of the central bank stated that progress towards the Fed's conditions for normalising policy doesn't mean that QE tapering will be announced imminently, as some big jobs reports are needed before that decision is made. The dovish tone was repeated throughout the press conference and chipped away at the dollar's initial rally. By the end of the trading session, the damage was clear; the market appetite for tighter monetary policy from the US was greater than the central bankers' conducting it. The dollar DXY index closed out the day 0.15% lower, with CAD and NOK leading the charge against the greenback. Today, risk appetite remains well supported as stability in China couples with the dovish Fed rhetoric. This has placed the greenback on the defensive against the G10 as a whole ahead of today's advanced Q2 GDP reading at 13:30 BST. Growth data for the second quarter is expected to print near record highs as the vaccine rollout, stimulus cheques and broad reopening boost growth during the initial stages of the recovery. Expectations sit at 8.5% QoQ annualised.

CAD

The Canadian dollar started yesterday's session on a strong footing as a stabilisation in China's equity market enabled the loonie to begin retracing Tuesday's losses. However, the release of June's CPI data added a hurdle to the loonie's recovery as inflation moderated faster than expected. Headline CPI fell from 3.6% YoY to 3.1% in June, highlighting the likelihood that the transitory factors pushing up price growth are likely dissipating. With the loonie's gains trimmed, investors lined up for the latest Fed decision. The press statement placed the Canadian dollar under further pressure, but the dovish tones of Chair Powell helped hit the decompress button. With the US dollar tumbling across the board, the Canadian dollar managed to retrace Tuesday's losses and then some. This morning, with the risk environment well supported, the loonie continues to trade on the front foot with only the CFIB business barometer for July set to be released at 11:00 BST. However, US GDP data for Q2 at 13:30 BST will also be pivotal for the Canadian dollar given the Canadian economy's ties with the US and the loonie's correlation with US equity indices.

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