Dollar plummets due to dovish Fed

Extreme moves in financial markets indicate some short and sharp lessons have been learnt on the dangers of attempting to second guess the US Federal Reserve.

The Fed’s dovish message and failure to reduce its current asset purchasing programme has sent the dollar reeling to a near seven-month low. 

Equity markets, on the other hand, are rallying, and the FTSE 100 has seen gains of 1.5% in early trade as the mining sector soars on the metal price recovery. Gold has seen gains of over 4% on dollar weakness and potentially premature fears of forthcoming inflation. Topping the index, Polymetal International and Randgold Resources have added 13.8% and 9.5% respectively, while defensives are marginally out of favour. 

ASOS is another significant gainer on the UK benchmark, adding 9.4% following the release of its sales figures which were up 47% to £208 million. The fashion stock has now gained 96% year-to-date. Overall UK retail sales were a disappointment, however, declining 0.9% last month against expectations for a 0.4% increase. This put a damper on the previous month’s incredible 1.1% gain, giving gravitas to the dovish stance emanating from the Bank of England.

On the continent, European shares have risen sharply and the German DAX has established a fresh all-time high. One must question the sustainability of this rally, particularly since much of the surge will be an accumulation of many wrong-footed traders embarking on short covering. The FTSE has failed to close above the 6660 level on a weekly basis since late May this year, but it will need to if further gains are to be expected.

Later this afternoon we will see weekly unemployment claims from the US, which are expected to rise to 331,000 from last week’s irrelevant number of 292,000. Existing home sales are likely to see a dropback by around 2.5% on July’s figure in light of the rise in US bond yields over the summer. 

The manufacturing index of the Federal Reserve Bank of Philadelphia will be closely watched. Having expanded for the third month in a row in July, we may now see a diminishing momentum.

We are forecasting the Dow to open 25 points higher 15,701.

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