Dollar remains under pressure while Yen soars following central bank meetings

Enrique Díaz-Álvarez03/May/2016Currency Updates

Both the Federal Reserve and the Bank of Japan took no action last week at their regular meetings. This led to the US Dollar losing even more ground. In fact, only the Australian Dollar performed worse than the US currency. The Yen soared further, rallying against every major currency.

Markets had been expecting that the BoJ would take aggressive action to stop the Yen rally. In the US, however, market expectations were met by the Fed, so it’s harder to explain the Dollar fall. Weakness in the Dollar can probably be attributed to mixed-to-weaker economic data out of the US.

We see businesses generally being worried about recent market volatility. We observed a spike in hedging before the Fed meeting, as has been the case before every major financial news event recently.

Now that the Fed meeting is out of the way, all attention will shift to macroeconomic releases, on which the decision whether or not to hike rates in June entirely depends. Investors will be looking for confirmation of hints that the performance gap between the US and the Eurozone is closing.

This Friday’s payroll report is the key data point this week as it gives some insight into the health of the US labour market. This time it takes on added importance as it’s one of just two payroll reports that will be released before the key Fed meeting in June. Markets are just starting to price in the possibility of a second rate hike at that meeting.

Major currencies in detail:


Businesses in the UK are still clearly focused on risk surrounding the potential Brexit. This continued uncertainty is giving business managers headaches as movements in the financial markets have become hard to predict.

We can see some hints that this uncertainty is leaking through the real economy; GDP growth in the first quarter dipped slightly, down to 0.4% (not annualised) from 0.6% in the fourth quarter of 2015.

Nevertheless, GDP data is notoriously backward looking. More important will be the leading business sentiment PMI indices that come out on Thursday. We expect these to show more resilience than consensus expects, which should provide good support for the recent Sterling rally.


The Euro achieved a strong rally against the US Dollar in spite of mixed messages on the Eurozone economy.

First-quarter growth came out considerably better than expected, at 0.6% (not annualised) compared to a consensus of just 0.4%. However, growth is not filtering through to inflation, which dropped again in April to -0.2% on the year, as core prices fell a sharp 0.3% to 0.7%.

We should not lose sight that inflation is the only macroeconomic variable targeted by the ECB and expect no let-up in monetary easing until a trend towards the ECB’s target is firmly established.

Now that both the ECB and the key macroeconomic data of the month are out of the way, political headlines may drive the Euro.

We have repeat parliamentary elections in Spain, just three days after the Brexit referendum, and no breakthrough in the latest Greek programme review.


The April Fed meeting did little to dissipate uncertainty over the timing of future US rate hikes.

There was no action on rates, as expected, and the tone expressed more confidence in the US economy. The statement dropped references to global economic risks and referred to the continued improvement in US labour markets and consumer sentiment.

The statement leaves the door open to a June interest rate hike, although this is contingent on global financial stability and solid US labour market reports. The next payroll report on Friday is key to whether the Fed hikes rates in June as we expect.


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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.