FX markets remain cautiously sideways as risk sentiment improved

As traders seek out further cues on monetary policy, the U.S. dollar eased lower in early European trade on Thursday. Still, it remained near a two-decade high ahead of the start of the Federal Reserve's Jackson Hole gathering on Thursday. 

As the U.S. currency's recent rally ran out of steam, the euro rebounded back over parity with the dollar. Recently, the U.S. dollar has been weakening due partly to a temporary easing of concerns about global economic growth. The euro and other currencies linked to investment sentiment of a more bullish nature, such as the Australian dollar, which gained nearly 1% against the greenback, were also helped by a more bullish mood across markets.

Several Fed officials have made hawkish remarks in recent days, signalling that with inflation still running at its highest levels in 40 years, the central bank will likely continue to hike interest rates aggressively in order to keep inflation under control. This has helped boost the dollar over the past week or so.

Since the beginning of the current month, Fed officials have actively managed expectations, indicating that the central bank has a more hawkish approach to policy and denying that there are problems in the economy that investors are so concerned about. Market participants are speculating over whether or not this means that there is a possibility of a third consecutive rate hike in September of 75 points.

There is no doubt that this has brought to the forefront the Fed's annual gathering in Jackson Hole, Wyoming, which begins later on Thursday, as well as the speech Chairman Jerome Powell will be giving at the end of the week.

Events of today

According to the latest German GDP data released earlier in the session, GDP grew by just 0.1% in the second quarter of the year in the largest economy and main growth engine of the Eurozone, which focused attention on the release of the Ifo business climate index later in the session.

It is expected that this index will fall to 86.8 in August, down from 88.6 in the previous month, adding to the signals that the continent's largest economy is heading into recession due to the economic downturn.

Later on Thursday, the minutes of the most recent European Central Bank policy meeting will also be due. During the last ECB meeting, the central bank pushed interest rates up by a higher-than-expected 50 basis points. This report is expected to contain a hawkish message as the central bank tries to curb the hot inflation rate.