Market News & Insights
25 September 2014

Janet Yellen’s Warning Pushes USD to Fresh 4 Year Highs

EUR/USD 1.2712
GBP/USD 1.6296
GBP/EUR 1.2818 (0.7803)
EUR/CHF 1.2077
GBP/CHF 1.5476
GBP/AUD 1.8477

Mario Draghi was interviewed on the radio early yesterday morning and he continues his promise to do whatever it takes to support the Eurozone. He said the ECB would maintain loose monetary policy until inflation returns to their target of 2% which saw risk appetite pick up from early trading. The EUR was initially resilient to the comments but after a poor German business confidence reading the single currency began to slide, European stocks rallied from 11 week lows as the promise of QE saw investors turn to stocks for returns.

The USD rallied to a four year high, the USD index, which measures the USD’s performance against a basket of major currencies broke through key resistance yesterday as the dollar bulls took control. The out-performance of the greenback through yesterday’s session was spurred by record growth in new home sales, while an article released by Bloomberg yesterday, citing Fed Chair Janet Yellen, warned markets of complacency stating rates could rise sooner than they think. In overnight trading Asian equities followed US and European markets higher, while the JPY traded at the worst level in 6 years against the USD. Both NZD and AUD also lost ground, NZD falling to fresh 12 month lows against the dominant USD, while AUD fell back to levels not seen since February.

The reign of the USD through Q3 has been nothing short of impressive, the USD is facing its 11th weekly advance out of 12 weeks as US data confirms the sluggish performance through Q1 was merely a blip. As we have mentioned the USD has several outlets for support, and appears to be unwavering in most market conditions, that being said the rally in USD is reaching over extended levels so further follow through may be limited for the time being. Fed commentary remains mixed, as does US data. A Bloomberg article released yesterday saw Janet Yellen speaking about market complacency on interest rates, warning that forward guidance was not fixed and could change. This was in contrast to last week’s FOMC, which cited mid 2015 as a time frame for rate hikes, with loose monetary policy and low rates for a “considerable time”. It is difficult for markets to see consistency in this rhetoric but Yellen did point out that rate increases will be data dependent.

On that front recovery remains mixed, yesterday’s record New Home Sales print saw sales rise 18% through August, while on Tuesday we saw manufacturing remain unchanged and on Monday existing home sales declined 1.8%. Should the Fed continue to provide mixed messages, and should US data continue to point towards a mixed recovery the USD rally is likely to come into some resistance. That takes us to today’s data releases from the US, durable goods orders for August are expected to rise .6% through August after a .7% decline in July, while the services and composite PMI readings for August are expected to show modest declines. The direction of the USD will be dependent on performance versus expectations.

The decline in the EUR continues with EURUSD breaking through 15 month lows below 1.2800 with two year lows now well in target at 1.2661. Once again a weaker data print from Germany (the IFO business confidence survey declined for the 5th consecutive month) and cautionary comments from the ECB’s Mario Draghi have seen the single currency under pressure. EURGBP continues to slide, a break below .7800 this morning targets 2 year lows ahead of .7780. We have already seen plenty of GBP sellers looking to trade at these levels this morning, many looking at forward hedging opportunities. Draghi is due to speak again today, and for now the single currency remain under pressure.

The lack of a relief rally in GBP has been telling post Scottish referendum, the pound did outperform for the first few days of this week but its advance was cautious and slow. Much of its gains came against the beleaguered EUR while yesterday’s USD advance saw GBPUSD erase all its post referendum gains as it traded back towards 1.6300. There has been no real major data releases to support GBP this week and that remains the same today. The BOE’s Weale is due to speak in Wales on the Economy and this may provide some lift for the pound as he is one of the MPC members calling for rate hikes. With this in mind the pound is likely to remain dominate against the EUR into the year end, while it battles with USD for further ground.