Dollar rally following surprisingly hawkish Fed comments

Tom Tong20/Mar/2014Currency Updates

GBP

A better day for sterling after a poor few days. The pound scratched fair gains across the board, although it hit monthly lows against the dollar following a solid dollar rally. Sterling also gained on the euro. UK unemployment figures beat expectations and the budget reflected the view that the economy will continue to see healthy growth. The budget also revolutionized the archaic pension system, giving individuals greater freedom over how they manage their pension.

In most eyes yesterday was a strong day for the conservative government, the city and the everyday citizen.

Osborne swaggered onto the Commons floor looking confident following a quick win in the morning with a solid release of unemployment figures. Unemployment beat expectations and dipped by 63,000 between November and January to 2.3M. Money in the pocket is also up. Bonuses for the months from November to January were also 1.4% higher than 2013.

The headline news was for pensioners and the pension industry with Osborne producing the biggest reform since 1921. The biggest alteration is the ending of compulsory annuities- insurance products purchased on retirement that pay out monthly sums. These have been slated for years, as interest rates remain low and people live longer, there has been huge concern that they did not provide true value for money. Starting from April 2015 savers with defined contribution policies will no longer have to buy an annuity when they retire. Instead people will be free to withdraw some or their entire pension when they retire. The income tax threshold was also increased for those on lower incomes and raised slightly for those on the 40% tax rate.

Data of note today includes- CBI industrial trends survey for manufacturing.

EUR

The euro bull run we have seen over the past few days was halted in its tracks yesterday with the dollar and pound hitting its gains hard following encouraging data and noises from both the UK and US.

The euro was trading sideways yesterday morning as traders waited for the day’s events to unfold. Following strong UK unemployment figures it began to dip and spent the rest of the day falling. It was the same story with the dollar, following the Fed fuelling a dollar rally.

The troika of Greek lenders agreed the latest rescue package after 6 months negotiations. The ECB also tightened its collateral rules for Ireland after the nation completed its rescue programme in December. The ECB accepted Greek, Irish, Portuguese and Cypriot government debt regardless of their rating at the height of the crisis however this approach is now being revised.

USD

Strong dollar rally yesterday following surprising Fed comments. Dollar at yearly highs against the yuan, monthly highs against sterling. Also strong movement to the upside against the euro.

Yesterday saw the Fed circus produce another card from their sleeve as the new ringmaster Janet Yellen stumbled into her first meeting and caught the market off guard. QE tapering was continued at $10bn, reducing monthly bond purchases to $55bn. However comments made by Yellen raised the chances of an earlier than anticipated increase in interest rates. The Fed dropped the US unemployment rate as its definitive measure for judging the economy’s strength and articulated it would rely on a wider range of measures in deciding when to raise interest rates.

Yellen went on to say that the Fed will probably end its massive bond buying program by this coming autumn and could proceed to raise interest rates around 6 months later, which was sooner than the vast majority in the market had originally anticipated. This change in sentiment was underpinned by the Feds end of 2014 unemployment rate forecast which was cut from 6.35% to 6.2%.

Ultimately as the market expected a change in QE and interest rates far later than Yellen suggested, we saw the dollar rally across the board. Elsewhere markets briefly plunged with US stocks hit hard, on the flip side treasury yields bounced up 9bp.

Data of note today includes- continuing jobless claims with the street calling a big number following encouraging Non-Farm Payroll. Also existing and continuing home sales.

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Written by Tom Tong

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