Dollar losses plateau ahead of tomorrow's FOMC meeting
17/Sep/2013 • Currency Updates•
US markets closed higher on the news that Larry Summers, former US Treasury Secretary has withdrawn from the race to be head of the US central bank. He was seen to want to reduce the amount of money being pumped into the economy faster than most. After Summers’ withdrawal the favourite for the role now stands as Janet Yellen – who is considered more likely to continue a more dovish approach. At the moment the dollar is suffering from concerns over the future leadership of the Fed with forward guidance becoming a crucial factor. No matter what the Fed announce in terms of forward guidance in the short term, the markets will be more focussed on who will succeed Bernanke as to where they see the evolution of the tapering strategy.
Investors keenly await the decision from the Federal Reserve’s two day meeting which begins today. They benchmark rate is to remain unchanged as long as unemployment exceeds 7% and inflation is no more than 2.5%. The economic projections will be released tomorrow.
Key data releases later today include Consumer Price Index (CPI) YoY which is a key indicator to measure inflation changes in purchasing trends, seen to fall from 2% to 1.6%.
Off the back of the strong economic data out of the UK last week, sterling has gone from strength to strength for the 9 months against the dollar. This has been the best rate to buy since January 18th. Therefore, there is increased speculation that the UK economy will recover at a faster pace than anticipated. Unemployment figures dropped lower than expected, thus indicating that interest rates could rise sooner than previously expected 2015, if the BoE unemployment target of 7% is achieved. The main focus this week will be drawn to Inflation data and BoE Minutes taking place today and Wednesday where we could see sterling climb further.
Genuine fears from the UK would be whether strengthen in sterling would be detrimental to the recovery of the UK economy with exports being one of the major factors stimulating growth. It is only thought SME’s to benefit with imports becoming more favourable.
The most significant data out of the UK today are Core Consumer Price Index (YoY) for August and Consumer Price Index (YoY) for July. Economists predict that pressure on UK household would have eased slightly last month from 2.8% to 2.7% which is still a 45th straight month above the government target of 2%.
Inflation dipped in the eurozone in August, according to official statistics released yesterday, and remains well below the target of the ECB. CPI for the eurozone area fell from 1.6% to 1.3% in comparison to the same month last year, with core inflation at only 1.1%. The ECB’s target aims for just below 2% but CPI has remained below that level for most of 2013.
Yesterday, EU, ECB and IMF inspectors arrived in Lisbon in order to carry out another review of the Portuguese 78bn euro bailout program. This time the talks might be tougher than ever before, as the new deputy Prime Minister Paulo Portas is putting pressure on the Troika to relax the country´s fiscal targets for easing the deficit target next year from 4% to 4.5% GDP. The figure has already been relaxed twice – in March and September 2012. Portugal is due to exit its bailout program in mid-2014.
Dialogue about the eurozone is turning towards the coming German political elections. Concerns over future bailouts for sinking economies like Greece and Portugal will surely be a factor in the decision over the next Chancellor for German taxpayers, who have shouldered the burden of the bailouts. The spectre of a third international bailout for Greece unleashed by Germany’s respected finance minister Wolfgang Schaeuble last month, put wind in the opposition party’s sails amid voter unease over how much more Berlin will have to fork out in Eurozone aid.
Germany has shown robust growth of 0.7% in the second quarter, helping to ease tensions across the recession-hit economies and cementing Merkel’s position. Future growth prospects are less promising, with rates nearer 0.3-0.4% expected.