The US dollar suffered its biggest weekly decline since November 2011, with the US dollar index tumbling 2.5% and EURUSD rallying 3.8% on the week, showing the largest advance since October 2011. The FTSE-100 broke (and closed) above the 7,000 for the first time in its history 24 hours after the Bank of England’s chief economist and MPC voting member Haldane mentioned the possibility for more QE and cutting rates to stem deflation.
Markets’ post-FOMC digestion punish USD
Now that markets have further digested the FOMC policy statement and Yellen’s conference, they’ve arrived to the accurate conclusion that the decision to remove “patient” from the FOMC statement was aimed at ridding the market of misinterpretation (after Yellen initially equated its removal with raising rates in two meetings), rather than with signalling an impending rate hike. The shift from calendar to data was already mentioned in my previous articles.
Markets’ calendar obsession has now been dissipated as the Fed modified its guidance to say that rates will be raised “…when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term”.
While US labour markets have shown marked improvement in job creation, there remains more progress on the wages front, which have yet to display consistent growth and break out of the +2.1%-2.3% y/y consolidation. More importantly, the inflation figures remain well out of reach, as core PCE price index (Fed’s preferred index) has fallen consistently from its May 2014 peak, to hit 1.3%. Neither the trend in core PCE, nor that in any CPI indicators point to a course of moving towards the Fed’s 2.0% goal.
Back to choppy FX markets
The violent selloff in the US dollar is a function of repricing exuberantly hawkish expectations with the rate hike timing, which now is being moved to September, if not December. We stick to our call issued late last year Fed rates will remain unchanged 2015.
As US data continues to be mixed, USD selling could intensify following the Fed’s dovish statement/projections. And with high yielding NZD and AUD expected to push higher, further currency jawboning will be just the start. Meanwhile, the ECB is set to stick with €3-4 bln in daily purchases of assets as part of its balance sheet building campaign, which will make each bounce in EURUSD an opportunity to sell. But if Eurozone green shoots are sustained and US disinflationary pressures escalate, then fresh Fed rhetoric could extend EURUSD well beyond $1.11.
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