Financial markets expect Fed to strike dovish tone tomorrow
26/Apr/2016 • Currency Updates•
The US Dollar fell across the board as markets opened for the week on Monday, with investors expecting a relatively dovish message from the Federal Reserve’s April meeting this Wednesday. Attention will be heavily focused on comments from Chair Janet Yellen about the state of the domestic and overseas economy.
Financial markets continue to completely discount the possibility of a policy change from the Fed and potentially there’s a downside risk to the US Dollar this week.
Over the past week, betting odds for a Brexit have swung significantly against Britain leaving the EU. This comes hot on the heels of comments from US President Barack Obama suggesting Britain would be better off inside the EU. As a result, Sterling rebounded against its major peers last week, rallying to its strongest position against the US Dollar since early-February this morning.
Economic data in Europe, Germany specifically, has added to the pressure on the Euro. Companies with suppliers in Europe may see this as a good opportunity to maximise their Euro purchases as the Pound strengthens. Similarly, we’ve seen firms with exposure to Dollar payments lock in the value of their Dollar purchases in advance of the Brexit vote.
Over the past few weeks, economic and political events have temporarily disrupted the predicted path of the major currencies and this serves to highlight the need for effective risk management.
Away from the major currencies, the Polish Zloty was the worst performing EU currency on Monday, with investors concerned that Poland may be downgraded again by rating agencies.
Announcements in the major economies are fairly thin today, with the G3 currencies likely to remain mostly range-bound ahead of significant central bank meetings in Japan and the US on Wednesday.
Major currencies in detail:
The Pound continued its impressive performance from last week, rallying 0.5% against the US Dollar on Monday.
Sterling was supported by the release of the monthly Industrial Trends survey from CBI. The index, which measures activity across UK factories, stabilised in April despite the gloomy global backdrop continuing to weigh on exporters.
The index defied expectations for a slowdown, increasing to -11 from -14, with manufacturers more optimistic about future production. This was surprising given uncertainty stemming from the impending EU referendum.
Today looks set to be another relatively light data day in the UK. The next main event will be this Wednesday’s GDP figures, which are expected to show that growth in the UK economy slowed in the first quarter of the year, presenting a downside risk for the Pound.
The Euro was little moved on Monday, ending 0.3% higher against the US Dollar, despite weak economic sentiment data from Germany.
The closely watched monthly confidence surveys from IFO missed expectations. Concerns over a China-induced global economic slowdown and weaker export demand from the US continue to dampen confidence among German businesses.
The headline business climate index fell below expectations to 106.6, albeit a slight improvement from the multi-month lows recorded earlier in the year. Similarly, the index’s expectations for future activity also fell short of forecasts to 100.4.
With no economic data to be released in the Eurozone today, attention will turn to the Fed meeting on Wednesday evening. Inflation figures for April on Friday will be the next major announcement in the Euro-area.
Expectations for a dovish Fed sent the US Dollar index 0.25% lower yesterday.
Weak economic data in the US provided no help to the US Dollar on Monday. New home sales fell for the third straight month, according to the US Census Bureau, declining by 1.5% to 511,000 in March.
While home sales have lost some momentum in the past few months, strong income growth and pent-up demand should support the sector this year.
The Dallas Fed manufacturing index also declined again, falling 0.3 points to -13.9, with weak global demand continuing to weigh on the industry.
The Fed’s interest rate decision on Wednesday remains the main event in the currency markets this week. In the meantime, durable goods orders, consumer confidence and the services PMI this afternoon could cause moderate volatility in the Dollar.
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