Fed's caution boosts euro sharply against dollar

Weekly Analysis of the Foreign Exchange Market

The path to rate hikes in the US will be slower than expected, and the euro will fall more gradually.

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La Federal Reserve adopted a distinctly non-committal tone in their meeting monetary politics March, held last week, in line with other central banks who have opted for fairly cautious messaging over the past two weeks, including ECB, Bank of England and the Bank of Japan.

 

The delay in the interest rate hike projections for 2016 shown in the dot plot of the members of the FOMC, going from four rate hikes for 2016 (according to December forecasts) to only two last week, weighed heavily on the American dollarThe greenback fell sharply against the rest of the foreign exchange main after the announcement, to end the week with a drop of approximately 1,5% in weighted terms of trade.

 

The financial assets from all over the world celebrated this prudence on the part of the Fed. Stocks, bonds and commodities around the world traded higher, with the S&P 500 index up in the last few months. U.S. has erased all of its losses this year – which removes the main cause for concern for the Fed, relating to financial market volatility.

 

EUR

 

Last week was quiet in terms of the publication of macroeconomic data from the the euro area What we did see was decent industrial production data, up 2,1% in January. We must bear in mind that the impact of a stronger euro, coupled with weak global demand, has not yet been reflected in these data, and we expect the rest of the first-quarter releases to be slightly weaker.

 

In any case, the euro was kept afloat by the declaration of the FOMC and rose sharply against the dollar, once again reaching its highest level in the past 12 months.

 

GBP

 

The March meeting of the Bank of England gave markets little new information about the expectations of members of CPM (Monetary Policy Committee). Interest rates and QE program targets were left unchanged, and the minutes were notable for their neutral tone, although for the first time there was some commentary referring to the lack of wage pressures in the economy. United Kingdom.

 

 

 

Financial assets around the world welcomed this caution on the part of the Fed.

 

 

 

The UK employment report published results in line with what we've been seeing. The labor market continues to tighten, although it's not fueled by faster wage increases. Unemployment remained stable at 5,1%, while the number of job seekers fell again by more than 18.000 applications, higher than expected.

 

The March 2016 budget had no impact on the foreign exchange markets. As expected, Minister Osborne He insisted that the government remains committed to a budget surplus for 2020, without any dramatic spending cuts or tax increases.

 

La pound It was one of the main beneficiaries of the FOMC's dovishness, rising more than 1% in trade-weighted terms in the hours following the Fed's statement last week.

 

USD

 

As expected, the Federal Reserve maintained its monetary policy without any significant changes. The members of the FOMC They reduced their forecasts for future rate hikes, and the average rate hike for 2016 was reduced to two, compared to last December's forecast of four. There were no dissenters in favor of an immediate rate hike.

 

At the press conference, in which Yellen Maintaining that neutral tone, Yellen referred to the global economic slowdown and financial volatility as factors whose impact on the US economy remains to be seen. Perhaps an important comment was that April represents a "real possibility" for another rate hike, something that markets are fully pricing in.

 

In line with the dot plot, we now expect two rate hikes in 2016. However, we note that markets continue to price in a smaller rate hike. We expect that as unrealistic market expectations are corrected toward the outlook, Fed, upward pressure will be generated on the dollar. However, it is clear that the rate hikes in the US will be slower than we expected, so we will revise our forecasts for the euro's depreciation, which will fall more gradually against the dollar.

 

Source: Ebury