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18 Mar 2015

Dollar dumpped as Fed statement sounds dovish

United States Dollar: It was a very active day in FX markets yesterday. The day started with the release of weaker than expected unemployment and a surprise set of weaker than expected average earnings figures. The unemployment rate fell to 5.7% vs. expectations for 5.6% and average earnings in January rose by 1.8% vs. forecasts for a rise of 2.2%. The positive run of earnings data of late has countered the low headline inflation readings and so this lower than expected wage growth will now cause a few concerns. MPC minutes were released at the same time on Wednesday morning too, the tone of which sounded quite uncertain. As we headed in to the release there was an ounce of expectation that they wouldn’t sound as dovish as last time around. Alas, it was a unanimous vote to leave rates unchanged and the pound was sold off across the board. Cable fell to a low of 1.4635 as investors next looked forward to the Budget. There were no real surprises from it. GBP/USD was mildly bid as Osborne gave a pretty healthy assessment of the state of the economy (GDP growth of 2.5% was expected this year, inflation had bottomed out and that the unemployment rate was set to fall lower). In any other circumstances, the pound might not have reacted, but after the earlier post earnings data sell-off, traders were looking for a good excuse to tidy up a few short positions ahead of Wednesday’s main event - the FOMC statement. GBP/USD bounced off of its lows and pushed gradually higher and back through 1.47 as the FOMC statement got ever closer. The statement didn’t really surprise all that much. As expected, they removed the following wording: ‘the Fed can be patient in beginning to normalise monetary policy’, intimating that interest rates would rise soon. However, there were various downgrades to growth. The central bank sees the economy growing 2.3% - 2.7% in 2015, below its previous predictions for 2.5% - 3%. The bank’s updated “dot plot”, which shows federal funds rate predictions of FOMC participants also showed that the Fed will raise rates a lot more slowly than markets were initially expecting or more precisely, for US interest rates to rise to 0.625% by the end of 2015. The US dollar gapped lower and GBP/USD jumped to a high of 1.5164. It was an extremely volatile period - cable dropped back quite quickly and has continued to slip back overnight to open in London at 1.4835. It’s not as busy in terms of data today - there’s no UK economic data. US Philly Fed Manufacturing is due later his afternoon and there’ll also be some focus across the Channel as the details of the ECB’s latest targeted long term refinancing option is released (i.e. ECB loans to EZ banks).

We expect a range today in the GBP/USD rate of 1.4750 to 1.4980

Euro: EUR/USD traded a very narrow range on Wednesday morning as traders treaded cautiously in the run up to the FOMC statement. As already mentioned above, the dollar slumped lower against everything following the announcement and EUR/USD rallied from 1.06 to a high of 1.1025 (more than a 400 point move in the space of a couple of hours!). Like GBP/USD though, it has settled lower through the Asian session and has come all the way back to open this morning at 1.0650. GBP/EUR has largely been unaffected by the Fed statement and trades at 1.3915 currently.

We expect a range today in the GBP/EUR rate of 1.3850 to 1.3965

Aussie and Kiwi Dollars: AUD/USD and NZD/USD both rallied post FOMC statement and hit respective highs of .7845 and .7548. The USD has recovered a bit since and it’s meant – just like other dollar cross rates – they’ve both fallen back again overnight. In other news overnight, NZ GDP printed as expected at +0.8% q/q and so most of the trading in Asia and Australasia has been dominated by the FOMC event. GBP/AUD and GBP/NZD are both a bit lower this morning and trade at 1.9330 and 2.0025 respectively.

We expect a range today in the GBP/AUD rate of 1.9200 to 1.9460

We expect a range today in the GBP/NZD rate of 1.9890 to 2.0115

Data Releases

AUD: RBA Gov Stevens Speaks

EUR: ECB Economic Bulletin, Targeted LTRO

GBP: No data

NZD: Visitor Arrivals m/m , Credit Card Spending y/y

USD: Unemployment Claims, Current Account, Philly Fed Manufacturing Index

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