Foreign Exchange News
19 March 2015

Yellen a Little Quieter

EUR/USD 1.0665
GBP/USD 1.4880
GBP/EUR 1.3950 (0.7168)
EUR/CHF 1.0570
GBP/CHF 1.4739
GBP/AUD 1.9340

The Fed gave with one hand and took away with the other, especially if you were a USD bull. The release of the Fed statement saw Janet Yellen and co. oblige market expectations with the removal of the “patient” phrase, for USD bulls this was the supposed signal for a further USD rally. Unfortunately the accompanying downgrade to inflation and growth expectations and a focus on the actual data coming from the states meant the Fed statement was notably dovish, which resulted in extreme USD volatility and sellers dominated the market. The dovish tone was not only coming from the US yesterday as the BOE minutes and UK Budget also saw some warning signs. The BOE minutes echoed Mark Carney’s comments last week, inflation expectations were revised down again, with the potential for UK CPI to fall below 0% in the next few months, while there were also some concerns on a strong GBP impacting inflation as well. Elsewhere, once again continuing the global dovish tone, the Riksbank in Sweeden surprised markets by cutting its deposit rates to -.25%.

The result of the Feds statement saw USD stocks soar, as the USD index dropped as much as 3% from highs at one stage. EURUSD rallied from lows yesterday below 1.0600 to above 1.1000 before EUR selling drove it lower once again. GBPUSD rallied from post BOE minutes lows just above 1.4600 to highs above 1.5150. We have been telling anyone that will listen that if USD rate hikes are to be dependent on data alone, then we are unlikely to see rate hikes this summer, in fact I would be surprised to see US rate hikes this year as long as data continues to point to a mixed recovery. Many feel that US labour market conditions alone are enough to secure rate hikes, this is unlikely to be the case, especially with the low global growth and inflation environment. It is also important to note the surging USD’s impact on corporate earnings, again something we expect to be topical in next month’s Q1 earnings reports. With focus now on US data we will be looking at weekly jobless claims, leading indicators and the Philly Fed survey for USD’s afternoon performance.

The BOE and UK budget resulted in GBP selling in the early part of yesterday. The minutes of the BOE meeting would suggest that the decision to hike rates remains finely balanced. The vote was unanimous to keep rates on hold at current record low levels, the MPC voting 9-0 to maintain policy at current levels. The budget also saw economic growth revised up but by less than expected with inflation expectations also revised down, while the Chancellor noted that the inflation target would remain at 2.0%. We expect GBP to remain relatively weak as elections continuing to hang over the pound, and while unlike the US, UK data remains relatively robust, they are taking far greater stock in inflation concerns.

The EUR has really been at the mercy of its counter currency moves, EURUSD covered a range in excess of 450 pips in the last 24 hours, even in the excessive 2015 volatility that is still a lot of ground. The rally towards 1.1000 resulted in heavy EUR selling once again, despite the USD weakness following the FOMC report the obvious theme is still dominated by a weak EUR environment, this is unlikely to change as long as the ECB continues with their QE program. Data remains light from Europe, but it is likely that and EUR rally will continue to find willing selling of the single currency.

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