Week Ahead in FX: Cautious Fed Hurts Dollar after ECB Bazooka - OANDA

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The Central Bank Kept the US Interest Rate Unchanged and Pulled Back Rate Hike Forecasts

Central banks around the world are running out of options to boost growth. The European Central Bank (ECB) over delivered on March 10 in a better than expected easing monetary policy action. The EUR did not react as expected and appreciated after comments from ECB President Mario Draghi and is now higher after a dovish Federal Open Market Committee (FOMC) statement delivered by the U.S. Federal Reserve.

The release of the FOMC statement and economic projections put downward pressure on the U.S. dollar. The USD was weaker across the board versus majors with commodity pairs (AUD,CAD and NZD) recovering after the oil price surge. The statement by the U.S. Federal Reserve was interpreted by the market as more dovish than expected. The Fed had been optimistic in signalling 4 rate hikes in 2016 and now the forecasts have pegged them closer to the market estimates of 2 rate hikes.

Organization of the Petroleum Exporting Countries (OPEC) members and non members have announced a date for their output freeze summit on April 17. According to the OPEC president the producers of 73 percent of crude will support the initiative. The news has boosted the price of oil even as current supply is far outstripping global demand.

The EUR has advanced 1.51 percent versus the USD in the past week. The surge of the single currency came at a time when the opposite was the expected after the ECB delivered an announcement to extend its stimulus package. The pair is trading close to the 1.13 price level and continues to be a threat to break it again as the dovish comments from the FOMC made it clear that the Fed is in no rush to hike interest rates in 2016. The U.S. central bank can afford to be patient as it waits for the economy to force a hike. The ECB on the other hand is almost out of options as the biggest takeaway from the market was not the size of the QE additions, but the comment from President Draghi that negative rates will not be the focus going forward fearing the consequences on the banking system.

Next week is for the most part free of central bank intervention. The aftermath of the first two weeks in March will continue to be felt throughout the forex market. Monetary policy divergence will have policy makers try to amend the market’s reaction through comments during the week. Some of the focus will be on economic indicators.

Germany is the engine of growth in the European Union, but has started to resist the easing policies of the ECB. There is a high likelihood that the lack of unanimity of the ECB bazooka in March was the result of German votes against the measures they have so openly criticized. Ito Institute will release its survey results on the German business climate on Tuesday, March 22 at 5:00 am EDT. The survey index has been dropping since December as the biggest economy in the EU is not immune to regional ills as the leading indicators shows. Institutional investor survey ZEW will be released the same day at 6:00 am EDT. The survey has remained on the optimistic scale, but the current level although beating the forecast is still just 1.0 when pessimism starts at 0.

U.S. crude oil inventories released weekly on Wednesday at 10:30 am EDT will once again put energy prices in the spotlight. The output freeze deal has been largely based on promises as no official agreement has been made. The more crude inventories grow the higher the pressure for producers to commit, or face another tumble in the price of oil.

Forex Market events to watch this week:

Tuesday, March 22
1:30 am AUD RBA Gov Stevens Speaks
5:00am EUR German Ifo Business Climate
5:30am GBP CPI y/y
6:00am EUR German ZEW Economic Sentiment
Wednesday, March 23
10:30am USD Crude Oil Inventories
5:45pm NZD Trade Balance
Thursday, March 24
5:30am GBP Retail Sales m/m
6:15 am EUR Targeted LTRO
8:30am USD Core Durable Goods Orders m/m
8:30am USD Unemployment Claims
Friday, March 25
8:30am USD Final GDP q/q

*All times EDT

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Daily Market Update 18/03/2016

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Please find below today's update which gives you an insight into the current market conditions, enabling you to keep informed and up to date on the latest currency movements.

Headlines

• Pound rises as BoE maintains status quo – Unanimous vote against cutting rates.
• GBP/EUR up on BoE statement – Eurozone CPI slides -0.2%.
• GBP/USD up 220 pips – As Fed outlook shift sends Dollar plunging.
• GBP/AUD rebounds from 14-month low – Sterling rallies vs. ‘Loonie’.

Sterling

The Pound increased in value against most of the majors yesterday as investors rushed to adjust their Bank of England rate hike bets after the central bank voted unanimously against cutting interest rates in March.

The BoE left rates on hold at 0.50% for the 84th consecutive month – that’s seven whole years of rock-bottom rates. This much was expected.

Given the recent market turmoil and the approaching EU referendum some investors had forecast a couple of votes to reduce rates further. But because this did not happen markets were wrong-footed and demand for Sterling increased as a result.

Euro

The Pound to Euro exchange rate rallied by around a cent yesterday as markets supported Sterling following the Bank of England’s unanimous decision to alter monetary policy. Although the debate coming into the New Year was ‘when will the BoE start hiking rates?’ the extent to which market confidence has slumped so far in 2016 means that a 9-0 vote against raising or reducing rates was seen as a hawkish outcome.

Across the Channel in the Eurozone inflation printed, as expected, in negative territory. The February CPI report showed that prices pressures declined -0.2% last month. The data weighed on the single currency but it was the BoE announcement that sent GBP/EUR rocketing higher by around 100 pips.

US Dollar

Sterling surged to a new monthly high against the US Dollar yesterday as investors continued to pour out of the ‘Greenback’ following the Federal Reserve’s amended policy outlook statement last night.

The sharp drop in 2016 rate hike expectations, which saw previous estimates of 100 basis points halved to 50 basis points, turbocharged risk markets and sent the US Dollar plunging across the board.

GBP/USD also took heart from the BoE announcement yesterday, as investors breathed a sigh of relief that policymakers did not try and take UK interest rates even lower.

Sterling’s 220 pip appreciation against the ‘Greenback’ marked its biggest one-day gain since October 2009.

Canadian Dollar

Having declined by around two cents on Wednesday as UK budget concerns and increased risk appetite following the Fed announcement damaged GBP/CAD, the Pound managed to claw back its losses yesterday thanks to the very mildly hawkish BoE statement.

US Crude oil did hit a three-month high yesterday but the rallying commodity did not translate into gains for the risk-sensitive ‘Loonie’ ahead of this afternoon’s CPI report, which is tipped to show that inflation slowed from 2.0% to 1.5% last month.

Australian Dollar

Sterling recovered from an 18-month low against the Australian Dollar yesterday, rebounding three cents after crashing through a number of resistance levels.

It was the Fed’s dovish statement and a better-than-expected unemployment report that sent GBP/AUD lower but demand for Sterling increased dramatically following the BoE minutes report. The ‘Aussie’ also had to weather remarks from Reserve Bank of Australia assistant governor Guy Debelle insisted that a lower currency would improve inflation prospects ad boost economic activity.

New Zealand Dollar

It was a similar story for the Pound against the New Zealand Dollar as it was in the other Sterling / commodity currency crosses. GBP/NZD tumbled sharply on Wednesday before rallying strongly on Thursday.

Data Released

12:30 CAD Retail Sales (MoM) (JAN) Medium 0.6%
12:30 CAD Consumer Price Index (YoY) (FEB) High 1.5%
14:00 USD U. of Michigan Confidence (M                                              

   

                                        

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Daily Market Update 17/03/2016

Please find below today's update which gives you an insight into the current market conditions, enabling you to keep informed and up to date on the latest currency movements.

Headlines

• Pound down on lower gov growth forecasts – Unemployment remains at 10-year low.
• GBP/EUR down on UK budget – BoE announcement on tap.
• GBP/USD up 160 pips – Fed slashes hiking outlook.
• ‘Aussie’ near 14-month high – Unemployment down to 5.8%.

Sterling

There was good news and bad news for the Pound yesterday.

The good news was that unemployment remained at a 10-year low of 5.1%, 116,000 new jobs were created and wage growth accelerated from 1.9% to 2.1%.

The bad news was that Chancellor George Osborne slashed the 2016 UK growth forecast from 2.4% to 2.0% and cut public spending over the next four years by -£3.5 billion.

Sadly for Sterling, it was Osborne’s Spring budget and the growth downgrades that stole traders’ attention rather than the upbeat labour market figures.

The Pound stands to lose more ground this afternoon if the Bank of England strikes a dovish tone, as most analysts anticipate it will.

Euro

The Pound to Euro exchange rate softened slightly yesterday as investors reacted to the latest UK budget.

The growth downgrade was considered the most important element of the budget in terms of impact on the Sterling exchange rate but most media outlets were captivated by Osborne’s surprise decision to unveil a tax on sugary drinks. The tax aims to bring in around £530 million, which will be spent on bolstering primary schools’ sports facilities.

Some claimed the sugar tax was employed by Osborne to divert attention away from the fact that he had missed his target of reducing the UK deficit as a proportion of GDP, or that he was cutting disability benefits by -£1.3 billion while raising the level at which people start paying the top rate of tax. But celebrity chef and health campaigner Jamie Oliver was pleased with the directive.

The single currency could come back under a little bit of pressure today if Eurozone inflation data shows that price pressures shrunk -0.2% in February as expected.

US Dollar

‘Cable’ jumped by around 160 pips last night as traders reacted to the Federal Reserve’s latest policy announcement. The Fed left rates on hold at 0.25% as expected but the bulls were upset by a modification to the central bank’s projection chart. In December policymakers were expecting to see interest rates rise by around 100 basis points in 2016 but due to ‘economic risk from abroad’ the Fed cut its outlook to 50 basis points in March.

The decision to slash the hiking outlook was seen by most traders as the equivalent of monetary easing and subsequently sentiment towards the US Dollar tanked and investors’ appetite for risk soared.

Canadian Dollar

The Pound lost out on almost two cents to the Canadian Dollar yesterday as a double-whammy of softer UK GDP prospects and improved risk sentiment bolstered demand for the ‘Loonie’ against Sterling.

Risk assets shot higher across the board following the Fed’s decision to pullback on rate hikes this year, which allowed the Canadian Dollar to surge to a ten-month high against the Pound.

Australian Dollar

Sterling slid to a near-14-month low against the Australian Dollar earlier this morning as GBP/AUD suffered from a triple-whammy. The Pound weakened on reduced GDP forecasts while the ‘Aussie’ garnered support in response to the Fed’s looser monetary policy outlook and a better-than-expected unemployment report. The Australian jobless rate slid from 6.0% to 5.8%, confounding predictions for no change.

New Zealand Dollar

The Pound to New Zealand Dollar exchange rate tumbled by around three cents yesterday as risk sentiment swelled on reduced Fed rate hike bets. The risk-sensitive ‘Kiwi’ was also boosted by a fourth quarter GDP print of 0.9%, which beat expectations of 0.7%.

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