USD strength post-hawkish Fed was short-lived

Following dovish press conference by ECB’s Draghi last week where the President hinted on potential action in December, the focus this week was firmly on the latest policy meeting by the members of the Federal Reserve. While the FOMC kept rates unchanged, the accompanying statement was widely interpreted to have somewhat of a hawkish slant with the committee saying they will “assess progress” towards their mandate at the next meeting, leaving the possibility for a December rate hike on the table. At the same time, the committee no longer sees possible restrain on economic activity and inflation from global and financial developments.

The consequent USD strength, which in turn weighed on EUR/USD and GBP/USD, was short lived and the major pairs gradually retraced the initial weakness over the subsequent two trading sessions. One factor to note for the weakness in the month-end related flow, which according to analysts at Citi are negative for USD and positive for GBP. As a result, despite the lacklustre UK related data, GBP/USD settled the week higher, albeit marginally.

Elsewhere, despite the hawkish Fed, USD/JPY ended the week lower after the BoJ refrained from announcing further monetary policy easing. Subsequent announcement which saw the central bank push back its 2% CPI target failed to support the pair and the price action remained a by-product of bearish positions being unwound.

Next week the notable highlights will be the BoE rate decision, minutes and QIR releases which will be of particular interest for investors given the recent dovish tones from the ECB and contrasting hawkish Fed release seen last week. Elsewhere, next week also sees the release of US NFP which will garner particular focus since the Fed last week left December on the table for potential lift-off depending on how US data performs.