On the belief that tomorrow night’s Federal Reserve meeting may see a Fed Chair push back against some of the more forthright expectations of an interest rate rise within the coming months, the dollar weakened yesterday. It didn’t collapse and by no means is anyone talking about the end of the recent USD rally, but yesterday was an opportunity for profit taking on the greenback.
While the updated economic projections, accompanying statement and Yellen’s own comments from her press conference, will attract lots of interest, the most important remains inflation in my eyes. Inflation will have to be revised lower following further deterioration in oil markets and its impact on the supply chain. Without strong core prices and resilient wage increases I cannot see the Federal Reserve hiking rates from its record low in June.
Yesterday’s moves were more about that than taking profits on what has been one of the easiest calls for traders and strategists alike. Investors are still looking to take the dollar higher and near term targets remain at 1.0330 and, ultimately, parity.
As a result it was hardly euro strength that toppled the mighty dollar yesterday; there remains very little reason to be optimistic on the single currency. Today’s ZEW number from the German economy is expected to show an increased level of economic confidence both now, and in the future. It is not the German economy that we are worried about of course, but literally everybody else’s within the Eurozone. Granted some of that increased confidence will come from a stronger Eurozone but we must be looking towards both inflation and growth measures for improvement and confidence will eventually be seen.
GBP remains in limbo this morning as traders and analysts wait on tomorrow’s MPC minutes, jobs data and the Budget. Quiet days in sterling data will lead speculators to focus on one thing; the election. As we have made clear since the Scottish referendum, the uniquely fractured nature of this year’s election – 7 person debates for example – poses a unique risk to sterling in the coming 7 weeks and beyond. While GBPEUR may be afforded slightly easier conditions on account of the hideous dynamics of the European single currency, we cannot say the same for GBPUSD.
Although there is the possibility of some dollar weakness from Yellen et al tomorrow evening and some elements of the budget could be seen as sterling positive; we remain bearish on GBPUSD with traders focusing on 1.4660. A break of that and people are talking about 1.42 and beyond.
Overnight, the Bank of Japan continued its monetary stimulus pace – 80 trillion yen worth of injections into the Japanese economy – but hinted at the possibility that near-term inflation may dip below the 0.0% level. While inflation has run higher in Japan as a result of sales tax increases and a run higher in wages, oil price movements have hammered expectations of a 2% CPI rate in Japan. We doubt that the Bank of Japan will do any stimulus soon – Japanese year end takes place at the end of the month – but cannot rule out more stimulus from an administration that is hell bent on hammering its currency into the ground.
