Dollar makes gains ahead of conclusion of crucial FOMC meeting

Tom Tong19/Jun/2013Currency Updates

GBP

Sterling lost ground against the dollar yesterday on the back of the UK inflation report which showed that inflation figures picked up again in May to 2.7% for the consumer price index after a surprise fall to 2.4% in April. UK inflation has remained stubbornly above the BoE’s 2% target since the financial target. If inflation continues to rise and moves above 3%, the incoming Governor Mark Carney will have to write a letter of explanation to chancellor Osbourne. Monetary policy manipulation will surely follow as interest rates may need to be lowered again to help suppress inflation.

The BoE minutes are due out today, which will discuss details in depth of the policy discussion concerning interest rates and how each particular member weighs up the prospects of the UK economy. This evening, outgoing Bank of England chairman Mervyn King will give his last speech and eyes will be focused on his final public sentiment regarding the UK economy.

EUR

Yesterday proved to be an interesting day for the 17 nation currency, in the early session of the day the euro slipped against the British pound as UK inflation figures came in stronger than expected. However, this ground was quickly lost as the German ZEW survey was published. The survey, which measures the confidence of consumers in the eurozone’s premier economy, printed at 38.5; a significant advance from the 36.1 in the previous month. The considerably better than expected reading sent the pairing down quite dramatically moving over half a percent.

The single currency’s moves against its other main counterpart, the US dollar, were not as dramatic but watched with just as much interest none the less. Increasing fears that the FED will announce or at least give a more definitive time line for their tapering of their QE bond buying programme continued to weigh on the pairing. As such EUR/USD moved to a 4 month high.

Comments from the ECB head Mario Draghi seemed to go largely unnoticed by the markets as he again stressed that the eurozone’s monetary authority stood ready to use interest rates and non-standard measures to shore up growth in the currency bloc’s economy, seemingly hinting again that negative interest rates are still an option even though consequences of using them could not be fully known.

Weighing on the euro also was new car registrations as they fell year on year to 5.9% their lowest level for May since 1993. The UK was the again the only large market to show an increase.

There is no top tier data to be released today in fact the only the data of note is details on the German 10 year bund auction as such all eyes will be on data and announcements from the Federal reserve. Beyond that, PMI figures from Europe on Thursday will be watched as if consensus is met they could provide a short term lift in the single currency.

USD

The dollar gained against most of its main counterparts yesterday morning as continued speculation on the FED’s announcement resulted in many investors and traders sitting the session out on the sidelines.

As in the UK, yesterday saw key inflation data released from the US along with consumer price figures. The numbers, even though meeting consensus, were soft enough to allow analysts to consider that it is still too early for the FED to pull back or taper. Differences of opinions and general anxiousness about tomorrow resulted in the greenback trading to a 4 month low against the euro

However, the move in cable was much more pronounced, especially in the afternoon session. With only greater than expected inflation figures out from the UK, the pound struggled to hold on to its gains against the greenback. Moves in the pair were due mainly to the Fed meeting coupled with continuing speculation of what actions Mark Carney will take when he arrives next month. Speculation of what if any further stimulus he will implement and join the so called currency wars to devalue the pound and help exports.

Today as already mentioned all eyes will focus on the Federal Reserve, as the FOMC meeting comes to an end and they announce their plans on monetary policy. Ben Bernanke’s speech will be closely followed to see if he gives any clues on a timeline of tapering their most recent bond buying stimulus package known as QE3.

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Written by Tom Tong

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