FX Market Summary 03-19-2014: Waiting For Yellen

There was a wider than expected Japanese trade deficit for February with a seasonally-adjusted deficit of JPY1.13trn as exports rose 9.8% over the year. There will be further pressure to maintain currency competitiveness and support exports, but the weaker yen will also maintain upward pressure on import costs, illustrating BOJ policy dilemmas. USD/JPY held above 101.25 in Asia on Wednesday with gains limited by concerns surrounding further Chinese yuan losses.

The latest UK labour-market data again triggered a significant market reaction. The headline claimant count data was better than expected with a decline of over 34,000 for February. The ILO unemployment rate was unchanged at 7.2% and stayed just above the Bank of England’s 7.0% threshold for considering a tighter monetary policy. Nevertheless, details within the data suggested that the unemployment rate will fall significantly next month.

The Bank of England minutes contained no headline surprises with unanimous votes for interest rates and quantitative easing being left on hold. The MPC committee expressed optimism that the recovery had broadened, but there were still comments that there was some way to go before it was sustainable. The bank did express some unease over the impact of recent Sterling strength while also remarking that further gains were possible if strong UK growth prospects attracted inward capital flows. GBP/USD pushed to test 1.6650 following the data without being able to break higher.

There was a significant decline in the US current account deficit to US$81bn for the 2013 fourth quarter from US$96bn previously which will maintain expectations over longer-term improvement in key fundamentals. The immediate market impact was very limited with players focussed on the Federal Reserve policy statement due later in the day, especially as it will be the first chaired by Yellen who will also hold a press conference following the policy meeting. Markets expect a further tapering of bond purchases within a commitment to maintain a loose policy.

In this environment, EUR/USD was confined to narrow ranges with no move on resistance in the 1.3950 area and pair drifted lower towards 1.3900 in New York.

The UK budget held no major surprises from a macro perspective, but there was some disappointment surrounding the 2015 GDP growth forecast of 2.3% with analysts expecting a firmer figure. GBP/USD was again unable to break above 1.6650 and dipped lower to re-test support levels near 1.6600.

The Canadian dollar remained under pressure, undermined by Bank of Canada Governor Poloz’s comments that an interest rate cut had not been ruled out. The resignation of veteran Finance Minister Flaherty also unsettled confidence given the possibility of a shift in long-term fiscal policy and USD/CAD moved to a peak at 1.12 before encountering some profit taking.

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