Last week central bankers took many traders by surprise. It started with the Federal Reserve’s monetary decision on Wednesday. The 25-basis points interest rate hike was fully priced in for several weeks but many market participants expected a dovish statement due to the softness in recent economic data. However, the statement was hawkish and Janet Yellen seemed to be confident in the path of economic growth.
Similarly, for the BoE after the surprise election results the U.K. was left with a hung parliament and economic data sending warning signals. The expectation was for unanimous decision to keep rates unchanged but three out of the eight Monetary Policy Committee members voted for a rate increase. This indicates that policymakers are becoming more concerned about higher inflation though the economy is not moving in the right direction.
The dollar’s reaction was mixed suggesting that investors are somewhat skeptical about the trajectory of the Fed’s interest rates and the reduction of $4.2 trillion in Treasury bonds and mortgage-backed securities. The USD ended the week higher against JPY and EUR, lower against commodity currencies, and almost unchanged against GBP.
The U.S. Treasury bonds also sent a similar message as yields declined across the curve. Investors have the right to be skeptical, especially after a series of weak economic data releases including retails sales, consumer prices, housing starts and consumer confidence. None of these reports justifies tighter monetary policy.
While only PMI surveys and home sales figures due to release from the U.S. the week ahead. The USD will likely take its cue from the Fed official talks. Six Fed members are scheduled to speak, including Lael Brainard, John Williams, Robert Kaplan, Patrick Harker, William Dudley, and Jerome Powell. If their tone seemed to be aligned with Janet Yellen then probably there’s something the Fed knows which we don’t and will be positive for the dollar. However, I think there’s a high chance we’ll get mixed messages thus making it hard to take a one-way bet on the greenback.
On the other side of the Atlantic, politics will be the key driver for the pound. While there’s no tier one economic data on the U.K. calendar, official talks on the Brexit process will kick off on Monday and unfortunately May is not in a strong position as a hung parliament will make the negotiations more complicated. Although I believe the pound is fundamentally undervalued the currency may still face downside risks depending on how tough will be the EU stance.
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