Dollar Pared Gains After FOMC, ECB And BOE Watched

Dollar pared some of yesterday's gain in Asian session today but remained generally firm. Yesterday's FOMC meeting turned out to be more dovish than expected with policymakers warned that modest growth, rising mortgage rates and persistently low inflation might affect recovery. Concerning QE tapering, the Fed intentionally separated the decision to taper from tightening and reiterated that the schedule of tapering would be dependent on upcoming economic data. The statement does not alter market expectations that the tapering would begin in September. DOW edged higher to new record high at 15634.42 before closing -21 pts down at 15499.54. 10 year yield jumped to as high as 2.702% but closed lower at 2..590%. Gold continued to stay in tight range above 1300 level. Dollar index had a wide range yesterday but closed nearly unchanged and is trading slightly below 82 level for the moment.

There were three key points noted in the statement. First, the rise in mortgage rates might pressure the housing market. This would eventually reflect in the big picture of economic recovery. Second, policymakers remained concerned that inflation rate has stayed below the target of 2%. As mentioned in the statement, 'inflation persistently below its 2% objective could pose risks to economic performance'. It's added that policymakers expect 'inflation will move back toward its objective over the medium-term'. Third, only Kansas City Fed President Esther George dissented the decision to maintain the asset purchase program at USD 80B per month. She was concerned that 'the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations'. In short, George preferred to see the Fed start tapering the accommodative measures. In June, she and St. Louis Fed President James Bullard voted against the decision, but for different reasons. Instead of urging for tapering, Bullard said last month that the Fed 'should signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings'. The strong wordings in the statement about concerns over low inflation probably have change Bullard's voting decision in July.

ECB and BoE meeting will be the major focus today. BoE is expected to hold rates unchanged at 0.5% and maintain the asset purchase target at GBP 375b. Minutes of July meeting revealed that no more policy maker pushed for expansion of the quantitative easing program, and thus, a change in policy is basically ruled out for this meeting. The main focus is whether BoE would continue to improve communications with forward guidance of monetary policy. For example, BoE might start to be more explicit on how long would it expect to hold rates unchanged at the current level. ECB is also widely expected to keep rates unchanged at 0.5%. Draghi might sound a little bit more upbeat on the economy as recent economic data showed improvements in the outlook. Meanwhile, ECB's forward guidance last month caused a bit of confusion to the markets and Draghi might make use of the press conference to clarify ECB's stance further.

On the data front, official China PMI manufacturing unexpectedly rose back to 50.3 in July, giving some support to Asian markets. But the HSBC PMI manufacturing was finalized at 47.7. Australia import price index dropped -0.3% qoq in Q2 versus expectation of 2.0% rise. Eurozone PMI manufacturing final and UK PMI manufacturing will be featured in European session. US will release Challenger job cuts, jobless claims and ISM manufacturing.