Market News & Insights
19 June 2014

Yellen Keeps USD Pinned Down

EUR/USD             1.3630

GBP/USD             1.7009

GBP/EUR             1.2483 (0.8011)

EUR/CHF              1.2167

GBP/CHF             1.5188

GBP/AUD            1.8054


Geopolitical concerns have played second fiddle to central banks in the last 24 hours as risk has returned to markets. Risk appetite was lifted following yesterday’s Fed release which saw no deviation in Fed forward guidance, despite signs of improvements in the US economy. No news is good news for markets on this front and with no indication or discussion on rate increases, markets have looked to take advantage of a prolonged low interest rate environment.


Yesterday’s European session saw stocks trade relatively flat in anticipation of the FOMC release and press conference, however in US markets stocks took their cue sending the S&P500 to all-time highs, with the NASDAQ composite climbing to its highest levels since 2000. The positive tone carried through into the Asian session with stocks approaching six year highs. European markets have followed suit and opened the day well in the green. The USD has been hardest hit post FOMC, losing ground particularly to EM currencies but also struggling against its G20 counterparts.


The impact on the USD is perhaps a bit unfair, if you can use that word in free markets, but it has become the case now that nearly every time Janet Yellen speaks the USD goes on the defensive. We knew Yellen was a dove before she took office and while she has steered away from outright dovish rhetoric, the markets view on this is if you are not hawkish you are dovish, meaning rates are expected to remain at record lows well into next year. The reality is little changed in the FOMC release, the pace of tapering continues at $10 bln, bringing monthly QE back down to $35bln, rates were held at .25%. Growth is seeing as improving with the lag from Q1 seeing as having little lasting effect however near term growth forecasts were lowered marginally but there was upwards revisions to the employment and inflation outlook.


So where does this leave the USD? Despite obvious selling in USD and a rallying of US treasuries we have not seen a total route in USD, as you would expect if the FOMC was really negative. Instead we’ve seen a slight repositioning in USD which saw gains into the FOMC release. Tapering has been priced to end in October but the key to USD’s health is the interest rate outlook. Improving data particularly on the jobs and inflation front can only help matters, but for now the Fed and Janet Yellen are happy to encourage markets and growth with no change to their forward guidance framework.


Yesterday saw the release of the BOE minutes but in the shadow of everything that has happened over the last week, with Carney’s suggestion of early rate increases, the minutes failed to inspire. The minutes did support Carney’s view and it is evident the MPC members were somewhat surprised that markets were not pricing in a 2014 rate increase. However, no outward talk around timing or any indication of a rate hike left GBP somewhat numb. There is a high premium priced into sterling based on rate hike expectations as we have discussed many times in the past, should we see further clarification on a rate hike there is still some room to advance for the pound, it may well be a case of buy the rumour sell the news however.


The EUR has found some lift in the last 24 hours with EURGBP rising back above the .8000 level and EURUSD rising above 1.3600 post FOMC last night. Light data this week has been helping the single currencies cause so far as it has stayed out of the limelight but with several ECB speakers across the wires today we may see a little more action. ECB Vice President Constancio and governing council member Visco are due to speak today. Markets will be looking towards comments on the ECB’s potential asset purchase program, anything on mechanics or timing will likely be greeted with further EUR selling, especially after the IMF encouraged the ECB to “quickly” adopt QE style policy.


Key levels to watch today: GBPUSD is trading back above 1.7000, a close above here will be taken as positive for the pair following fresh 5.5 year highs posted earlier this morning. EURUSD back above 1.3600, resistance to the topside should hold at 1.3660. EURGBP trading back above .8000, with resistance at .8020 and .8065 above that, recent annual lows at .7960 act as support.