The Forex Week In Review

The Forex Week In Review

US rate-hikes expectations moved firmly back into the spotlight this week with the action in Forex markets headlined by key Fed comments and the release of the April FOMC meeting minutes. Early in the week we head Fed’s Williams noting that he felt conditions were lining up for the Fed to raise rates twice and possibly three times this year, pointing specifically to the next few meetings including the upcoming June meeting. This sentiment was then reiterated by Fed’s Lockhart who noted that he also expected the Fed to raise rates twice this year as a solid base-case scenario with room possibly for three hikes.

Following these hawkish comments we then had the release of the April FOMC meeting minutes which bolstered bulls’ support for a possible June hike. The removal of “global risks” from the recent Fed rhetoric was viewed by many as paving the way for a June hike and the latest minutes appear to be reaffirming this view. Policy makers said it would be appropriate to hike in June if economic data picks up in Q2 and that inflation and labour market condition continue to firm up. “Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labour market conditions continue to strengthen and inflation making progress toward the 2% objective, then it likely would be appropriate for the Fed to increase the target range for the Fed Funds Rate in June”.

Overview

USD The US Dollar continued its recovery over the week supported by Hawkish Fed comments and Hawkish FOMC meeting minutes which highlighted a strong chance of a June rate hike provided economic data picks up with labour market conditions and inflation continuing to firm up. US April Inflation data came out in-line with expectations growing 2.1% YoY on core and 1.1% on headline.
EUR EUR Eurozone’s CPI slipped into deflation again, falling 0.2% YoY in April from the flat growth it registered a month ago. The lack of upside inflationary pressure amid extended weakness in energy prices and lackluster demand suggests ECB would more likely than not expand its stimulus again to spur demand. ECB’s Coeure noted that although the ECB had no plans at present to cut the deposit rate again it remained an option “in principle”
GBP Sterling strengthened over the week deriving strong support from reports that the latest Brexit polls show the “Remain” campaign have pushed ahead with a growing majority alleviating fears that the UK will vote to leave the EU on June 23rd. Sterling was further support by the latest labour market data which shows a record number of people were employed over the first quarter with a 44,000 increase over the three months to March, taking the total to 31.58 mio, the highest level since records started in 1971. Wage growth was also strong over the same period growing 2% against an expected 1.7%.
JPY The Japanese Yen softened over the week, weighed upon by diminished safe-haven demand amidst a recovery in risk appetite fuelled by moves higher in Oil prices. On the data front, Following a better than expected Q1 GDP print, Japan’s machine tool orders also staged a surprise 5.5% MoM increase in March (Feb: – 9.2% MoM). According to the Cabinet office in Tokyo, the rebound was led by demand from manufacturers.
AUD The Australian Dollar was lower over the week weighed upon by the release of the RBA’s may meeting minutes which cast a dovish shadow over the currency. The minutes showed that the bank had been briefed about” ongoing inflation trends” which lead them to conclude the likelihood that inflation would be lower for longer and could be reflected in lower wage-growth.”Moreover, the lower-than-expected CPI outcome could not be explained entirely by temporary factors”. On the data front Australian Unemployment rate remained unchanged in April despite expectations of an increase.
CAD Despite firmer Oil prices once again this week, the Canadian Dollar actually decoupled from the commodity to trade lower, weighed upon by severe disruption caused by the wildfire outbreaks which damaged Oil production in the affected regions. Economists expect a sharp slowdown in Canada’s economy after a strong start to 2016, while a lengthening of the timeline for oil production to return to normal levels could add downside risk to the outlook. Canadian CPI on Friday printed above expectations on the core reading.