Tag Archives: US Dollar

USD Strength as Fed ends Quantitative Easing programme

The USD has appreciated following the Federal Reserve’s announcement that its programme of Quantitative Easing (QE) will end. Despite the global economic slowdown, the Federal Open Market Committee (FOMC) were generally more upbeat about the underlying strength of the US economy than in previous months but did state that interest rates would remain on hold at their current lows for a considerable time.

The Dollar has appreciated against the Pound, forcing GBP/USD back below 1.60, hitting a low of 1.5962 so far. Against the Euro and Swiss Franc the US Dollar has also advanced forcing EUR/USD down to 1.2556 and USD/CHF up to 0.9606.

A copy of the FOMC Statement can be found below:

http://federalreserve.gov/newsevents/press/monetary/20141029a.htm

October 29 2014

 

Information received since the Federal Open Market Committee met in September suggests that economic activity is expanding at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has continued to run below the Committee’s longer-run objective. Market-based measures of inflation compensation have declined somewhat; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced. Although inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.

The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. Moreover, the Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, the Committee decided to conclude its asset purchase program this month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee anticipates, based on its current assessment, that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Loretta J. Mester; Charles I. Plosser; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action was Narayana Kocherlakota, who believed that, in light of continued sluggishness in the inflation outlook and the recent slide in market-based measures of longer-term inflation expectations, the Committee should commit to keeping the current target range for the federal funds rate at least until the one-to-two-year ahead inflation outlook has returned to 2 percent and should continue the asset purchase program at its current level.

 

 

US Dollar Strengthens on FOMC Minutes

The USD has appreciated overnight after minutes released by the Federal Open Market Committee (FOMC) showed that the US central bank was gradually taking a more hawkish stance as economic conditions (labour market and inflation) begin to normalise to levels last seen before the financial crisis.

The growing prospect of interest rate rises in the US coming sooner than expected have caused the USD to appreciate, forcing GBP/USD back below 1.66, hitting a low of 1.6565 so far and forcing the EUR down against the USD to 1.3242. Against the Yen the USD also appreciated sharply with USD/JPY hitting a high of 103.96.

Currency Matters

Stock markets across Europe and America have fallen as shares in one of Portugal’s largest banks were suspended after falling more than 17% after reports that their parent company missed some short term debt repayments, a reminder that the European banking crisis may not be over.

With US interest rates set to stay near zero this year and the market looking for safe havens the Japanese Yen appreciated sharply, forcing USD/JPY from a high of 101.66 to 101.07 before recovering slightly to 101.18, still down 0.42%. The Euro has fallen but has remained surprisingly resilient, falling against the USD from 1.3649 and currently trading at 1.3597 but could be susceptible to further falls should confidence in the Portuguese banking system and the wider Eurozone continue to deteriorate.

In the UK, the Pound is relatively steady after the Bank of England voted to maintain the Bank Rate at 0.50% and maintain its asset purchases at £375bn. GBP/USD has traded between 1.7106 and 1.7122. GBP/EUR has appreciated from 1.2551 this morning currently at a high of 1.2595.

European Central Bank Rates Hit Historic Low

In an effort to encourage lending, stimulate the Eurozone economy and avoid deflation the European Central Bank (ECB) today cut its main benchmark rate from 0.25% to 0.15%. More significantly the ECB cut its deposit rate from 0.00% to minus 0.10% meaning that commericial banks will have to pay the ECB to lodge their money with the central bank in a bid to incentivise banks to lend to businesses rather than hoard cash at the ECB, therefore stimulating economic growth. The ECB also exteneded its programme of long term loans offerd to banks who lend to businesses. ECB President Mario Draghi indicated that further measures could be introduced in the future.

 

Following the ECB announcement and the following press conference the Euro fell from a high of 1.3643 to a low of 1.3504 before recovering to just below 1.36 by 14:00 GMT. Against the Pound the Euro fell from 0.8139 (1.2286) to a low of 0.8065 (1.2399) before appreciating back towards 0.81p by 14:00 GMT.

 

Elsewehere, as expected the Bank of England maintained its Bank Rate at 0.50% and the size of its Assett Purchase Programme at £375bn. We now await the minutes of that meeting due to be released 08:30 GMT on Wednesday 18th June to gain an insight into if the Bank of England is any nearer to raising UK internest rates. The Pound continues to trade between 1.67 and 1.68 against the US Dollar.

BoE and ECB Hold Interest Rates

The Euro continues to remain under pressure following concerns that the Eurozone risks a period of deflation and prolonged low interest rates. The official Eurozone inflation rate released on Tuesday confirmed that Eurozone inflation fell from 0.90% in November to 0.80% in December.

As expected, the ECB held interest rates at their record low of 0.25%. In the post meeting press conference, ECB President Mario Draghi commented that he expected key ECB interest rates will remain at present or lower levels for an extended period of time. Draghi also warned that the Eurozone may experience a prolonged period of low inflation and that risks on economic outlook remain on the downside.
As a result the Euro depreciated against the US Dollar hitting a low of 1.3548 and depreciated against the British Pound hitting a low of 0.8231 (GBPEUR 1.2149).

In the UK, the Bank of England kept its interest rate at 0.50% where they have been held since March 2009 and maintained its Quantitative Easing Asset Purchased Programme at £375bn. The Bank only released a brief statement and issued no further guidance. Back in August, Governor Mark Carney said unemployment would have to decline to 7% before an interest rate rise would be considered. An improved economy has meant that this could happen sooner than expected. The majority of economists still do not expect UK rate rises before mid-2015, however, expectations are mounting that the Bank of England could start to raise interest rates in 2014.

The Pound continues to trade near recent highs (1.6604 02/01/14) against the US Dollar at 1.6441-1.6498 and has so far hit a high of 1.2149 against the Euro.

US Debt Deal: Signed, Sealed, Delivered

Congress finally managed to reach an agreement yesterday evening regarding an increase to the federal debt limit and a short term budget which will reopen the government and send furloughed workers back to work. Despite Congress having left passing a bill to the very last minute, as has become a common occurrence in recent years, judging by market reaction, investors did not seem too phased despite a plunge back into global economic crisis being potentially imminent.

Following the aversion of what could have been the beginning of a truly global crisis – the first US default in over 200 years – very little changed in the markets. Equity markets remained rather quiet as did the FX market, especially when taking into consideration the enormity of the catastrophe that could have materialised had an agreement not been reached. The dollar rose slightly in the build-up to Congress reaching a deal with GBP/USD falling to a daily low of 1.5893 just after 17:00 yesterday, however the greenback has pared its gains this morning with cable rising to a daily high of 1.6092 and similarly EUR/USD reaching 1.3637 so far this morning after having fallen as low as 1.3472 yesterday.

Judgement Day Wednesday

Tomorrow evening we will see potentially the most crucial Federal Reserve Interest Rate Decision and FOMC statement of this year. Whilst the Federal Reserve is widely expected to maintain interest rates at their current levels, speculation has grown in recent months that they will make their first reduction to their unprecedented bond buying program this month. ‘Tapering’ has been the buzz word for the last month or two ever since Federal Reserve Chairman Ben Bernanke hinted this summer that the Fed would begin to taper its current $85 billion per month bond buying program before the end of the year.

As the state of the US economy has gradually improved over the course of this year and US unemployment figures have closed in on the Fed’s 7% target (disregarding this month’s miserable Nonfarm payrolls), expectations have grown that September will be the month that tapering will begin. The majority of market commentators had been expecting a gradual reduction to begin this month at around the $10-$15 billion mark, however with the very poor Nonfarm payrolls released earlier this month it remains plausible that the Fed will hold firm and maintain their current purchasing levels for yet another month.

Given the amount of speculation that has been afforded to this meeting we can expect to see a substantial amount of volatility surrounding the greenback in the run up to and following the release of the Federal Reserve’s decision. Should the Fed decide to maintain their current level of stimulus we could see cable advance further on its gains this week with a potential test of 1.60 upwards. A reduction of $10-$15 billion would likely hold GBP/USD steady with limited downside risk for sterling following the consistently positive data that has been released recently concerning the UK economy – enough to even suggest that we have “turned the corner” according to George Osborne. Whilst a reduction of $20 billion upwards would likely lead to significant Dollar strengthening right across the board and could see cable par its recent gains whilst 1.56 levels would likely hold off any reversal.

Tomorrow we will also see another interest rate decision however the outcome of which is considered a lot more certain and its impact far less wide-reaching. The Bank of England will release their interest rate decision and minute’s tomorrow morning at 09:30 UK time. BoE Interest rates and stimulus levels are expected to remain unchanged following the Bank of England governor Mark Carney’s comments to a Parliament Select Committee last week where he indicated that the BoE will maintain historically low interest rates for as long as necessary.

GBP/EUR is currently trading close to the 1.19 level, its highest level since the turn of 2013, with a consistent break above 1.1950 potentially signalling a return to levels above 1.20. However, until the outcome of the German Federal Elections later this month, which now seems a forgone conclusion in favour of Chancellor Angela Merkel, movement in GBP/EUR is likely to be limited. Once the German election has finally been decided we may well see a re-emergence of the Euro-Crisis that has notably been shunned from media attention in the run up to elections. A return to Euro-zone bailouts and a seemingly imminent collapse of the euro will only help push sterling back up to 2012 levels against the common currency.

Dollar Strength

The Dollar has continued to appreciate with the Dollar Index breaking last week’s high and reaching a high of 83.50 so far today. GBPUSD hit a new recent low of 1.5136 on the interbank market today and a test of the recent low of 1.5008 last seen on the 29th May is favoured, with a likely break leading to a test of support at 1.4830. EURUSD currently trades around 1.30 after briefly breaking below 1.30 earlier today hitting a low of 1.2991.

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UK Inflation Falls and Takes Pound With it

As expected this morning UK inflation figures fell, even lower than what the markets had been expecting. UK Consumer Price Index fell to 2.4%, down from 2.8% the previous month and below market expectations of 2.6%. UK Core Consumer price index was also down 40 basis points to 2.0%, recording a figure below market expectations of 2.3%. UK Producer Price Index and UK PPI Core Output were also down at 1.1% and 0.8% respectively.

In what was a rather busy morning in terms of UK data releases, nearly every piece of economic data released concerning the UK economy was negative. As would be expected Sterling fell right across the board following these inflation figures’ release. GBP/EUR fell to a daily low of 1.1777 however remained within the approximate 1.5 cent range that the pair has been trading within for the last month. Similarly Cable fell to a daily low of 1.5163, continuing the pairs decline since early May with a further test of the 1.5157 level now likely and should this break the next area of substantial support being found at 1.5127.

Much earlier this morning we saw the Japanese Yen return to its depreciating ways following Japanese Economy Minister Akira Amari’s much more coy response regarding the potential end to the Yen’s slide against the Dollar. This comes after the Yen strengthened yesterday following the economy minister’s comment that suggested further weakening of the Yen may adversely impact upon Japanese people. The bank of Japan’s record monetary stimulus program would now appear to be having the desired effect that Japanese finance ministers had initially hoped it would. Figures released in Tokyo last week showed that Japanese GDP rose to an annualized 3.5%, suggesting that the Bank of Japan’s efforts to end a decade of inflation are actually having a positive impact on the economy. This increase in money supply has had the inevitable, yet “unintentional”, effect of depreciating the Yen, which rose to above USD/JPY 100.00 two weeks ago for the first time in over four years, and has consequently lead to a boost in exports. Data released so far suggests that BoJ Governor Haruhik Kuroda may actually be able to reach his ambitious target of reaching 2.0% inflation in just two years. USD/JPY is currently trading at 102.68 and speculation will now grow as to whether the pair will reach 105.00.

With very little data due out this afternoon, trader’s attention is likely to turn to tomorrow where we will see a number of key releases. In the early hours of tomorrow morning the Bank of Japan is set to make their interest rate decision and monetary policy statement, potentially giving the market an indication of how long their extremely loose monetary policy will continue. Moving back westwards, later tomorrow morning UK BoE minutes will be released, followed by the US FOMC minutes tomorrow evening. As Sir Mervyn King comes to the end of his tenure as governor of the BoE, it is unlikely that we will see any drastic information released in the BoE minutes, however the market will be keen to see if the FOMC minutes or Fed Governor Ben Bernanke’s press conference give any indication as to when a reduction in the Federal Reserve’s bond buying program will be brought to an end.

Currency Matters

Yesterday saw substantial volatility within the markets courtesy of mixed PMI figures released in Europe and a tacit message from Mario Draghi suggesting that the European recovery will take longer than expected. Whilst the BOE’s decision to maintain interest rates and quantitative easing levels at their current level had little impact upon the markets, German and Euro Zone PMI figures falling short of expectations and Mario Draghi’s negative assessment of Europe’s recovery caused a substantial move in the euro throughout the day whilst GBP/EUR eventually closed flat at 1.1777. The dollar experienced similar levels of volatility yesterday following higher than expected US Initial Jobless Claims as GBP/USD closed near a six week high of 1.5225 and EUR/USD also closed up at 1.2926.

Despite the relatively high levels of volatility that were witnessed on both sides of the pond yesterday, the largest market movements were attributed to economic news coming out of Asia. In the early hours of yesterday morning the Bank of Japan committed to a substantial bond buying program worth over half a trillion dollars per year – the size of which took markets by surprise. Unsurprisingly however this lead to the most considerable Yen sell off that we have seen for quite some time with the Yen closing down across the board. The Yen touched a near three and a half year low yesterday against the Dollar and has now pushed above this level with USD/JPY reaching 97.15 so far this morning, whilst GBP/JPY has hit 146.67.
This morning we have seen relatively minor movements in the markets following the release of Euro Zone Retail Sales and German Factory Orders, both of which came out above expectations. Market participants are likely regrouping following yesterday’s volatile trading environment and preparing themselves for the release of the US Nonfarm Payrolls later today. Following the weaker than expected US data yesterday, another subpar performance today for the US jobs market could cause the Greenback to drop off even further, with GBP/USD potentially reach 1.53+.