The week kicked off in a tame manner with a lack of data points as well as the Jewish New Year on Monday and Tuesday before the rest of the week saw the majority of focus fall on the highly anticipated FOMC rate decision. Despite the decision being considered by some to be a close call, the Fed kept rates on hold and then surprised some market participants with a more dovish rhetoric than expected.
The more dovish aspects of the release included Yellen’s mentioning of the global environment and more downbeat than expected comments on the labour market. Furthermore, markets were also surprised to see one Fed official even forecasting negative rates for 2015 and 2016. However, it is worth noting that while the meeting was considered to be dovish, Fed’s Yellen did reiterate that all meetings were live and 13 officials still saw a rate hike before the end of the year.
In terms of the consequences in FX markets to the FOMC release, the USD saw a substantial bout of weakness to see the US Dollar Index reach its lowest level for over three weeks, with the greenback softness benefiting major counterparts. The JPY and EUR further benefited after the release due to their unofficial status as safe haven currencies, with EUR gaining across the board as the currency is now viewed as a slightly less attractive option for carry related trades and as such some unwinding has been observed. Elsewhere, commodity currencies were also seen as major beneficiaries of the USD, bolstered both directly by USD weakness and indirectly by commodities profiting from a weaker USD.
Looking ahead to next week, there are a number of Fed speakers, including Yellen, Lockhart and George, due to comment this week and after Thursday’s dovish rhetoric market participants will be paying particular focus on any indication as to FOMC stances to try and gauge the timing of a hike. While separately next week has the potential to see some volatility in EUR with the Greek elections set to be decided on Sunday night and a number of data points scheduled for throughout the week. Most notable of the European data points include German IFO data, which may be closely observed considering the German ZEW Survey (12.1 vs. Exp. 18.3, Prev. 25) missed expectations by a significant margin.