Dollar dips following Yellen speech. Eurozone inflation fails to pivot Euro

Tom Tong01/Apr/2014Currency Updates

GBP

Sterling snapped out of the traps quickly. London opened with sterling hovering around the levels sustained over the Asian session. The release of consumer credit, mortgage approvals and money supply gave the pound some support. Consumer credit came in slightly below called, mortgage approvals were the same, 75,000 was called, however we saw 70,000. Money supply saw an uptick. The market then calmed as ears primed for Yellen to address the market. Traders were jumpy as last week’s Yellen speech caught many off guard, nobody expected Yellen to be so specific on the likely timescale of an interest rate alteration and the results were wide reaching. London closed with sterling ticking up against the dollar, whilst flat against the euro.

This week the speech was again insightful, with Yellen explaining she still sees slack in the US economy and extraordinary policy is going to be needed for some time. Following the comments, the dollar took a slight beating- cable popped up almost half a cent. USD/JPY flipped last week’s losses with a greenback shift to the upside, whereby against Emerging Market currencies the dollar took losses.

Overnight sterling trading was slim across the board; traders will be waiting on this morning’s release of UK manufacturing PMI – set for release at 8.30 GMT. A slight retracement is called as last month’s figure was staggeringly high. Any notable move will surely lead to pivots.

EUR

London closed with the euro flat against the pound. Notable gains against the dollar following Yellen’s speech. The euro has scuttled up across the board this morning following encouraging manufacturing PMI.

The key play for yesterday was Eurozone inflation data. The result was a shocker, although surprisingly the effect to the currency was minimal, further proof of the euro’s resilience and widespread investor appetite for the currency. Inflation crawled in at its lowest level in more than 4 years in March, heightening fears that the currency bloc is treading on thin ice; the ultimate fear is the ice breaking leading to proper deflation which would surely halt the economic recovery. Inflation slowed to 0.5% last month, the lowest since November 2009. The reading strengthens the case for the ECB to loosen monetary policy on Thursday’s meeting.

The unexpected strength of the euro which nudged up against the dollar yesterday, despite the drop in inflation, has kept prices down by lowering import costs, therefore the appreciation of the euro since 2012 has knocked about 0.4-0.5% off inflation. Presently the ECB expects inflation to remain below its target at least until the end of 2016, when it has forecast a reading of 1.7%. Doubtless, the market will continue to monitor the situation closely, Thursday should provide some clues on the ECB stance.

Data of note today- February unemployment rate.

USD

London closed with the dollar down against both the euro and sterling. Losses were also taken against EM currencies. The dollar dropped across the board after a candid speech from Yellen. The sobering view of the state of the US economy saw the dollar take a hit although, as it alludes to continued QE for the economy, we saw stocks tick up. A good day for US equities, not so much the dollar.

Specifically Yellen said there was still slack in the US economy and labour market, therefore suggesting the Fed would continue QE and loose monetary policy for some time. It would appear Yellen tried to soothe the markets. The chair of the Fed said that its stimulus will be needed for “some time” to help the economy and jobs market. Perhaps the intentions were also to calm concerns following last week’s speech- the previous comments over the likely timescale for a change in interest rate were not taken lightly and produced some notable market moves. Yellen also addressed the significant part time workforce who are, after full time work, currently sat at 7M. Furthermore, she touched on the declining labour market participation rate which is an increasing cause of concern.

Data of note today – Redbook index, consumer spending and car sales.

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Written by Tom Tong

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