US Dollar falls as Yellen reiterates plan for gradual rate increases, Sterling rallies
30/Mar/2016 • Currency Updates•
The US Dollar plunged following a speech yesterday evening from Chair of the Federal Reserve Janet Yellen. Speaking on the US economic outlook and monetary policy in New York, Yellen struck a dovish tone, suggesting that the Fed should proceed ‘cautiously’ given global risks.
Yellen reiterated that developments abroad imply meeting employment and inflation objectives would require a more gradual path for the Fed funds rate than was anticipated in December. However, she suggested that headwinds from abroad would abate and we see the Fed firmly on course to hike interest rates twice in 2016.
Sterling rose across the board as investors returned from the long Easter break on Tuesday. The Pound rallied off the two-week low in trade-weighted terms it reached last week, with concerns regarding a possible Brexit in June abating somewhat following the release of two polls over the weekend.
The latest polls from Ipsos gave the ‘in’ campaign a significant eight percentage point lead, against recent suggestions that the outcome of the vote may be too close to call. Bookmaker odds for a Brexit have fallen in the past few days, having risen as high as 40% in the immediate aftermath of the Brussels attacks.
This short-term respite for GBP has provided some UK businesses with an opportune moment and we’re seeing many implement risk management strategies to protect their margins from impending GBP downside risk.
German inflation figures for March, to be released this afternoon, are expected to show a modest improvement and could give a good indication as to this Thursday’s more pivotal Euro-wide announcement. The main event of the week, however, will be this Friday’s labour report in the US, including the latest nonfarm payrolls number.
Major currencies in detail:
The Pound soared by 1% against the US Dollar on Tuesday to its highest level in a week.
Now less than three months away, the EU referendum remains the biggest market mover for the UK currency. Three month implied volatility in the Pound spiked again yesterday to its highest level since May 2010.
The Bank of England’s financial policy committee, led by Governor Mark Carney, suggested financial stability would be at risk following a vote to leave the European Union this summer. The FPC also warned of a further depreciation in Sterling, which we would expect to lose around 10% of its value against the US Dollar in the event of a Brexit.
With no announcements in the UK today, attention will turn to Mark Carney’s speech on Thursday.
The Euro was range bound for most of trading on Tuesday, although ended 0.7% higher against the US Dollar following the speech from Janet Yellen.
Comments from member of the ECB Jozef Makuch on Tuesday suggested that the central bank’s deposit rate, which was earlier in the month cut to -0.4%, means negative rates in the Eurozone may be nearly exhausted. Makuch claimed that lowering the interest rate would have less and less effect, dampening some expectations that the ECB may cut its interest rates further in the coming months.
Focal points in the Eurozone this week will be the meeting accounts from the European Central Bank’s March meeting and inflation data on Thursday.
Tuesday afternoon’s speech from Janet Yellen sent the US Dollar index 0.6% lower against its major peers.
Consumer confidence in the US ticked upwards again in March, with individuals more upbeat about the short-term outlook for the domestic economy. The latest index from the Conference Board increased to 96.2 from a revised 94, with concerns regarding financial turmoil at the beginning of the year beginning to abate. Confidence has now remained above 90, which is generally considered a good reading, every month since September 2014.
Meanwhile, single family home prices increased in January according to Standard & Poor’s. The S&P/Case Shiller home price index rose by 5.7%, which is the same as previous and over twice the rate of inflation.
Earlier in the day, Fed member John Williams suggested that the US economy could easily handle two or more interest rate hikes this year should inflation head back towards its two per cent target.
Public sector employment figures, which are a good indicator for the more significant nonfarm payroll, will be released at 13:15 UK time and be the main focal point in the US economy today.
Receive these market updates via email