The Forex Week In Review
There were two key focal points for currency traders this week: the November FOMC meeting and the November BOE meeting.
The FOMC meeting passed as expected with the Fed keeping rates on hold, however USD bulls were left disappointed as the voting split showed one of the previous dissenters fell back to voting for rates on hold. Alongside this development, the statement was lacking any clear timing refence and failed to encourage the view that a December hike is a foregone conclusion. The Fed noted that they are awaiting “some” further evidence of progress towards their goals. The Fed did note that the case for a hike “continued to strengthen” – but fell short of signalling a December hike.
Following the Fed, focus then shifted to the BOE. Whilst the bank had previously guided that they expected to cut rates further at the meeting, bears were left disappointed as the bank opted to keep rates unchanged and also revised higher their inflation forecasts. Indeed, the statement was far less Dovish than many were expecting with the bank noting that they “have a neutral bias around policy going forward” and thus removing the emphasis on further easing. Adding further support for Sterling was the outcome of the UK High Court ruling which found that the UK Government cannot legally trigger Article 50 without Parliamentary approval. Markets welcomed the ruling as an indication that Britain could avoid a Hard Brexit and thus GBP short positioning was extended.
USD A rebound in support for Donald Trump weighed on the US Dollar this week as uncertainty grows ahead of the US elections. Weakness extended into Friday as the latest Non Farm Payrolls report came in weaker than expected at 161k vs 175k expected. The Unemployment rate stayed steady at 4.9% whilst average hourly earnings were stronger than expected at 2.8% vs 2.6% expected and 2.7% prior.
EUR The single currency traded higher over the week, taking its cue from a weak US Dollar. On the data front German unemployment declined by 13,000, beating the forecast of zero. In addition, manufacturing PMI reports were mixed, as the German reading of 55.0 almost matched the forecast, but the Eurozone reading of 53.5 missed expectations. Eurozone employment rate came in at 10%, in line with the forecast.
GBP BOE held interest rates at 0.25% but added about £20 billion of debt to its corporate bond shopping lists. In addition, the central bank said that it will stay pat with its current policy for the rest of the year. Inflation is forecasted to rise to 1.30% in 4Q16 (previous: 1.20%), 2.70% in 4Q17 (previous: 2.00%), 2.70% in 4Q18 (previous: 2.40%) and eases to 2.50% in 4Q19 which was unchanged from previous forecast. Growth was also revised upward in the near term but impact of Brexit is expected to drag growth in 2018. Growth projection was 2.20% this year (previous: 2.00%), 1.40% next year (previous: 0.80%) and 1.50% in 2018 (previous: 1.80%). Data wise, UK’s services PMI increased to 54.5 in October (September: 52.6), climbing to the highest level in nine months.
JPY As widely expected the BoJ kept monetary policies on hold even as weak consumption and external headwinds force it to concede that inflation is still far away from its target. Japan’s gauge of consumer confidence fell from a three-year high reading of 43.0 in September but settled at a healthy print of 42.3 in October. The employment sub-index led the decline in optimism, indicating that more households were more concerned about job market conditions in the near term.
AUD Australia is expected to expand around 2.50- 3.50% by June 2017 and June 2018 but quicken to 3.00- 4.00% by December 2018, according to the freshly released quarterly monetary policy statement. Growth forecast was little changed from the previous forecast except for June 2018, which the central bank forecasted quicker growth of 3.0-4.0%. Inflation is forecasted to rise at the same pace of 1.50%-2.50% in June 2017, June 2018 and December 2018, unchanged from August forecast. On the data front, retail sales climbed 0.60% MOM in September (August: +0.40% MOM), its quickest pace in eleven months.
CAD The continued sell off in Oil over the week, fuelled by concerns about the health of the proposed OPEC production cut deal, weighed on the Canadian Dollar over the week. Data on Friday showed that the Unemployment rate remained unchanged at 7% in October.