USD - The US Dollar was fairly heavily punished last week, reversing the recent strength seen over previous weeks and moving back to early/mid March levels against most major crosses. The turn against the greenback was fairly swift, with most notable moves seen in EUR/USD, GBP/USD, AUD/USD and USD/JPY. Market commentators were eager to highlight their surprise for momentum in the move, with two-three weeks firmness in the dollar being relinquished in such a short space of time. There were some market developments to support the shift, but more overly global Central Bank positioning appeared to be the main underlying cause.
The first half of last week was an extremely quiet affair on the US economic calendar, with market participants having to wait until the Wednesday evening for the main highlight in the form of the FOMC meeting minutes. The Federal Reserve moved more in line with the Bank of England’s recent alteration in forward guidance, with the Board of Governors at their latest policy meeting unanimously rescinding the 6.5% unemployment rate threshold for hiking interest rates. Also mirroring the BOE, the Fed decided to take a broader array of economic indicators into account when considering future monetary policy, placing more emphasis on overall economic performance going forward. There was a noted move against the USD, but realistically this news just officially recognised what had already been pencilled in, with previous comments earmarking a hike in interest rates potentially six months after asset purchasing has been drawn in. And with pressure remaining on the USD towards the end of the week, despite much more positive economic indicators, one certainly should assume there is more afoot regarding price action. On the Thursday, weekly initial and continuing jobless claims, the import price index and an impressive narrowing of the Federal Budget Balance all failed to have any impact. On the Friday, monthly PPI and Michigan consumer sentiment easily beat official forecasts, however once again bias remained against the dollar.
Outlook – There is certainly a growing trend of gains being hard to come by for the USD, which in turn are then easily overturned. Monetary policy in America should be encouraging enough to support the greenback, but this scenario is seemingly not being translated. Economic fundamentals from other majors appear to be taking the upper hand, making for the greenback taking a back seat. Going forward this atmosphere might simply continue, with emphasis not being placed on the US economy, but more concentrated on developments elsewhere. This week could be a quiet affair, effectively the calm after the storm. There is certainly a raised interest in the currency markets just recently, but this could simply equate to subdued conditions, as investors stand by the sidelines for a more informed mindset. It could be said that the Federal Reserve have handed more potential ammunition to USD bulls, but on evidence from late last week, that consensus is not being realised.
EUR – An interesting week for the single currency gone past, making significant gains against the dollar, but moving in alignment with the pound. EUR/USD has broken to the upside, reaching out towards the highs seen last month, whilst EUR/GBP once again moved more or less sideways. European economic data during the week was mixed and rather peripheral; German and Spanish industrial production both showed promise, whilst France and Italy underperformed. French trade balance improved, whilst Germany’s declined. Other news saw Greece successfully return to the bond markets, raising 3blnEUR in its first auction since 2010. EUR/USD remained supported through the week however, with rumours circulating that a major central bank was buying the cross.
Outlook – Rhetoric over the weekend would suggest the ECB are concerned about this latest bout of strength seen in the single currency. At a meeting of 20 Finance ministers and central bank governors in Washington on Saturday, ECB governor Mario Draghi during a press conference warned that further strength in the euro could trigger monetary easing to hold off low inflation. Price action so far this morning has seen the upside capped in EUR/USD from this update, but price action still appears slightly hampered, suggesting that it’s just a short term phenomenon. One has to believe that comments like this are like a red rag to a bull for the financial markets, with further strength in the EUR possibly now inevitable, simply to see what the ECB have got up their sleeve. Any move in that direction will likely be cautious, making for a potentially subdued week as mentioned above.
GBP – One of the best performers last week was the GBP, making notable gains against the USD, and allaying recent downside pressure. Economic data from the UK was positive all week, with industrial production, manufacturing production, trade balance and a housing sector index all providing support to the GBP. Whilst many had been predicting economic health in the UK to wane whilst citing unsustainable conditions, there is growing evidence that the UK economy continues to thrive. All these data sets therefore appeared to take a firmer hold on price action during the week, lending strength to the pound. The main reason for this has been the recent change in the Bank of England’s forward guidance, switching from an unemployment target to a wider scope of “spare capacity absorption” when assessing future monetary policy. Should the UK economy be moving studiously forward, then this will suggest a closer term rate hike and provide an argument for sterling strength; this certainly appeared to the case last week. The other highlight last week was the Bank of England MPC meeting, which as we predicted in our last update, was indeed a non-event. Rates were left on hold at 0.5%, whilst QE was left unchanged.
Outlook – Once again one shouldn’t expect anything to change from the BOE any time this year, with the central bank being one of the only one’s globally to have clearly outlined their monetary policy. Whilst the likes of ECB and the Fed make for greyer assessment, the Bank of England’s more transparent forward guidance should hold court; this will likely result in decent/positive economic indicators continuing to strengthen the GBP, whilst slack will weaken it. Inflation indicators on Tuesday and unemployment data sets on Wednesday provide the highlights.
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