16 Mar 2016

Dollar weakens on dovish FOMC statement

United States Dollar: Yesterday saw the dollar weaken across the board as the latest FOMC statement was released by the US Federal Reserve. The release included the line that “global economic and financial developments continue to pose risks” to the US economy which lead to a sell-off of the dollar. With a calming of Chinese equity markets over recent weeks and core inflation starting to head towards target as well as ongoing strong jobs data economists were left underwhelmed by the dovish tone. As expected, the benchmark rate was left unchanged at 0.5% and the accompanying “dot plot” showed a downward shift in the expected pace of rate hikes. The median estimate is now for two further hikes this year, down from the four predicted in Decembers projections. EUR/USD jumped from 1.1080 to around 1.1220 when Fed Chair Janet Yellen’s press conference was wrapped up. UK Chancellor of the Exchequer, George Osborne presented his latest budget from Westminster yesterday. Headwinds from overseas economies were blamed for a downgrading of GDP estimates for the next five years with this year’s expected growth lowered from 2.4% to 2%. Other headline making policies included a tax on sugary foods/drinks, a raising of duty on tobacco, a freeze on duty on booze and an increase in the threshold to where you pay 40% tax to £45k. Data-wise, yesterday saw a slightly better than expected wage growth from the UK with 2.1% growth from a year earlier when 2% had been pencilled in. Today is the Bank of England’s “Super Thursday” with the latest data-dump from policy makers on Threadneedle St. There is no change expected from last month’s 9-0 vote in favour of holding rates at 0.5%. The primary focus will be on the accompanying statement and whether BoE Governor, Mark Carney and other MPC members acknowledge the upcoming EU Referendum is having a drag on the economy as highlighted in recent PMI data. We have seen further USD weakness this morning with EUR/USD at 1.1285. GBP/USD which was falling fast after this week’s latest EU Referendum poll has pared its losses moving up from 1.41 to currently trade at 1.4295.

We expect a range today in the GBP/USD rate of 1.4150 – 1.4370

Euro: Today brings the one data-release of note from the Eurozone with Final CPI expected to mirror the Flash estimate of negative 0.2%. ECB head, Mario Draghi might be forgiven for scratching his head if he has glanced at a EUR/USD chart this morning. Last week’s stimulus measures from the central bank were seen as going further than expected and EUR/USD dipped to a low of 1.0825 on the back of the expansion of QE and further cuts to interest rates. We are now 4.5 cents higher! GBP/EUR is lower at 1.2670.

We expect a range today in the GBP/EUR rate of 1.2580 – 1.2730

Aussie and Kiwi Dollars: The Kiwi and Aussie have soared post FOMC as the dovish tone saw a rise in equity markets and commodity prices. Brent Crude is at $41.5 after being as low as $38.2 on Tuesday. Extra impetus has been added to the antipodeans move higher after New Zealand’s Q4 GDP print 0.9% when 0.7% was expected; Australia saw a the level of unemployment fall to 5.8% from 6%. AUD/USD is at .7630 with GBP/AUD at 1.8725. NZD/USD is at .6810 with GBP/NZD at 2.0970.

We expect a range today in the GBP/AUD rate of 1.8610 – 1.8890

We expect a range today in the GBP/NZD rate of 2.0880 – 2.11

Data Releases

AUD: No data

EUR: Final CPI y/y

GBP: Monetary Policy Summary; Official Bank Rate Votes

NZD: No data

USD: Philly Fed Manufacturing Index; Unemployment Claims

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