The Week That Was…
A pivotal week in Forex markets passes largely as expected with the US Federal Reserve deciding to keep rates unchanged. Markets were largely expectant o fthe result with only narrow pricing of a rate hike. The accompanying statement and press conference provided some interesting additional information with the Fed clarifying it’s concern over Global risks posed by the China slowdown. Listing the downbeat inflationary environment and persistent Dollar strength as further issues opposing as hike, the interest rate forecasts show that although the majority still favour at least one hike by the end of the year, four members now expect the first hike to come next year and one member forecasts negative rates in 2016.
Market reaction was fairly subdued due to the diminished USD long positioning and low expectations of a hike. The majors all strengthened against the US Dollar following the news and market sentiment is shifting firmly towards a December hike being the earliest real contender, with risks skewed to a 2016 lift-off.
- USD As with the University Of Michigan confidence survey missing last week, this week we saw CPI falling 0.1% month on month (first decline since January) and the Philadelphia Fed survey missing also, extending a string of recent data weakness. Dovish FOMC saw USD unwinding into the weekend.
- EUR Remains supported in the wake of broad Dollar weakness. Greek elections and ECB speeches next week should see Euro continue higher due to it’s inverse relationship with risk. Sustained strength in the aftermath of the Dovish FOMC could spur more Dovish QE talk by the ECB.
- GBP Sterling strengthened over the week as UK wages were seen growing at 2.9% , the fastest rate in six years followed by further hawkish comments from BOE Governor Carney confirming that the issue of a rate rise would come in to “sharper relief at the turn of the year”. BOE’s Haldane, a well known dove, commented on Friday that should downside risks materialise the BOE should consider easing instead of tightening, spurring some GBP weakening.
- JPY Safe haven flows continue to drive JPY which strengthened on the back of the FOMC decision. Markets are increasingly expecting further BOJ easing and next week;s CPI data will be closely watched
- AUD The Australian currency rebounded this week fuelled by short covering into the FOMC and further USD weakness following the decision. The absence of higher US rates and the prospect of Chinese stimulus leave AUD supported in the near term with RBA Governor Stevens praising the robustness of the Australian economy in comments this week.
- CAD Strength in oil prices this week saw the Candian currency supported though damage to the Canadian economy from the continued oil price decline portends further BOC easing. Despite the BOC sounding more positive in recent communication which was also the case before the two previous rate cuts we saw this year.