After the hawkish surprise last week from the Fed when the FOMC spooked markets by signalling much earlier rate hikes than expected, Chair Powell struck a decidedly more cautious tone yesterday. He repeated the temporary nature of current price pressures and although the recent debate on QE is on the cards, the Fed is nowhere near hiking interest rates. Other Fed officials this week have spread a similar message with New York Fed President Williams warning overnight that the recovery requires more time.

The latest smoke signals from the Fed all point to September as the key meeting when the Fed is most probably able to declare that substantial progress towards their goals has been achieved. This means we should perhaps pencil in the Jackson Hole symposium in August as the precursor to this where Powell really preps the markets.

Stocks certainly gained from the more dovish rhetoric with the tech-laden Nasdaq hitting fresh record highs. The broader S&P500 gained too with only the defensive utilities sector in the red. European bourses have opened up this morning marginally higher after Asian markets posted solid gains.

Dollar holding up for now

After hitting a two-month high at the end of last week, the greenback has suffered two days of losses and given back roughly a third of its sharp gains posted since the FOMC meeting last Wednesday.

Commodity-linked currencies benefitted the most from the more cautious Powell and this may be the case through the summer as those central banks on the hiking cycle see their currencies appreciate the most.

EUR/USD too was helped by markets breathing a sigh of relief, although the 1.20 barrier above is formidable with a confluence of resistance including the 50% retracement level and the 100-day and 200-day simple moving averages below and above.

EUR/GBP moving lower ahead of BoE

We get UK and European PMI data released today and traders will be on the look out for signs that we have seen a peak in manufacturing and a pick up in services due to covid restrictions easing.  EUR/GBP also has to contend with the Bank of England meeting tomorrow, which my colleague Han Tan discussed yesterday and the potential for a hawkish surprise.

Perhaps the market read the report as sterling has appreciated against almost every single G10 currency today and EUR/GBP is breaking down through recent support at 0.8542. The downward trendline from the December high has acted as resistance above and bears have their eyes on the cycle low at 0.8472.

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