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EUR/USD Sinks After Dovish FOMC Minutes

August 19, 2020 by

EUR/USD was moving sideways till 15:45 GMT today but then started a decline. The fall accelerated after the Federal Open Market Committee released dovish minutes of its latest policy meeting. While usually, a dovish monetary policy outlook is negative for the dollar, it looks like the pessimistic outlook was more hurtful to US stocks, allowing the greenback to profit in its role as a safe currency.

US crude oil inventories decreased by 1.6 million barrels last week after falling by 4.5 million barrels the week before but remained above the five-year average for this time of year. Analysts had predicted a bigger drop by 2.9 million barrels. Total motor gasoline inventories dropped by 3.3 million barrels but also remained above the five-year average. (Event A on the chart.)

FOMC released minutes of its July 28–29 meeting today. The notes were rather dovish as the Committee voiced concerns about the US economic recovery after the coronavirus pandemic:

Economic activity still appeared to have declined at a historically rapid rate in the second quarter. The projected rate of recovery in real GDP, and the pace of declines in the unemployment rate, over the second half of this year were expected to be somewhat less robust than in the previous forecast. Although the staff assumed that additional fiscal stimulus measures would be enacted beyond those anticipated in the June forecast, the positive effect on the economic outlook was outweighed somewhat by the staff’s assessment of the likely effects of several other factors. Those factors included the increasing spread of the coronavirus in the United States since mid-June; the reactions of many states and localities in slowing or scaling back the reopening of their economies, especially for businesses, such as restaurants and bars, providing services that entail personal interactions; and some high-frequency indicators that pointed to a deceleration in economic activity.

The Committee members also discussed yield curve control as another policy tool to stimulate the economy but ultimately rejected it. (Event B on the chart.)

Yesterday, a report on housing starts and building permits was released, showing an increase in both indicators to a seasonally adjusted annual rate of 1.50 million in July from 1.22 million and 1.26 million respectively. Analysts had predicted a smaller increase for both indicators. (Not shown on the chart.)

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