Wednesday 21.10 BST. US Treasury bonds rallied and the dollar came under pressure after the Federal Reserve maintained its policy stance following a meeting of its rate-setting Open Market Committee.
The Fed said it would continue to buy $85bn of Treasury and mortgage securities each month “until the outlook for the labour market has improved substantially”.
“The tone of the FOMC statement was on the dovish side, with references to soft growth, rising mortgage rates, and the need for inflation to increase over time,” said Dean Maki, economist at Barclays.
“However, we view the substantive changes as mainly aimed at separating the decision to taper the pace of asset purchases from that of implementing the first rate hike, rather than signalling that tapering has become less likely.”
There was little in the statement to alter the widely held view that the Fed would begin scaling back, or “tapering”, its asset purchases this year.
“For now, we stick to our September call, not least as we expect another solid employment report on Friday,” said Harm Bandholz, chief US economist at UniCredit.
“But the risk that the tapering will begin later than September has undoubtedly increased with today’s statement.”
The 10-year US government bond yield swung from being up about 8 basis points, before the release of the statement, to standing 2bp lower at 2.59 per cent by the close of New York trade.
The dollar gave back early gains against the yen and the euro, with the dollar index – a measure of its value against a basket of currencies – down 0.3 per cent.
And goldsaw choppy trading, sliding to within striking distance of the $1,300 level before pulling back to finish just $3 lower at $1,323.
US equities initially extended early gains, with the S&P 500 touching 1,698 – within a whisker of its record intraday high – but then ran out of steam and closed a fraction lower.
The Fed’s statement came hard on the heels of US data that many analysts argued had raised the chances of the central bank starting to scale back its quantitative easing programme in September.
The US economy grew at annualised pace of 1.7 per cent in the three months to June, against expectations of about 1 per cent.
Furthermore, payroll processor ADP said the US had created 200,000 jobs in July – boding well for this Friday’s all-important non-farm payrolls figure.
Meanwhile, central banks on the other side of the Atlantic will be in focus on Thursday.
The European Central Bank and the Bank of England hold scheduled policy meetings – although no fireworks are expected from either.
The consensus is for the ECB to leave its main interest rates unchanged.
The BoE’s Monetary Policy Committee is also considered unlikely to spring any surprises, with analysts noting that the UK economy had shown continued signs of strengthening during the past few months.
The prospect of policy divergence between the BoE and the Fed helped drive sterling to its lowest level against the dollar for a month.
The 10-year UK gilt yield rose 4bp to 2.36 per cent, while the equivalent maturity German Bund yield edged up 1bp to 1.67 per cent.
UK equities, however, outperformed their continental European counterparts, as the FTSE 100 rose 0.8 per cent against a 0.2 per cent rise for the FTSE Eurofirst 300 index.
In Tokyo, the Nikkei 225 Average fell 1.5 per cent, unsettled by an early bout of renewed strength for the yen.
In industrial commodities, Brent oil reversed an early fall to settle at $107.70 a barrel, up 79 cents, while copper rose more than 2 per cent in London to $6,880 a tonne.
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