FED Gives the USD Love, Will the ECB do the Same?

The Dollar recovery continued this morning as the markets take the latest FOMC meeting as hawkish when coupled with the latest wage growth and inflation figures out of the U.S. Stats out of the UK and the ECB minutes could provide some support for the GBP and EUR, though for now, the Green is Back. · FX Empire

Bob Mason

Updated Wed, Feb 21, 2018, 10:23 PM

Earlier in the Day:

There were no material stats released through the Asian session this morning, which left the FOMC meeting minutes released late in the day on Wednesday in focus.

A more hawkish set of minutes, which included references to upward revisions to economic projections and a more optimistic outlook towards inflation had the markets adjusting views on the number of rate hikes for the year.

Following the release of the minutes, FOMC voting member Kashkari spoke during the Asian session and, while he didn’t provide any views on policy, said that he has hopes of inflation picking up and that the FED would not be considering the financial markets when making policy decisions.

While the Aussie Dollar was up 0.01% to $0.7805, the Kiwi Dollar was in the red at the time of writing, down 0.04% to $0.7316, as the pair recovered from heavy losses earlier in the day as U.S Treasury yields eased back, while the jump in yields drove demand for the Yen, which was up 0.32% to ¥107.43.

The stronger Yen added further pressure on Japanese equities, with the Nikkei falling 1.24%, with the Hang Seng giving up some of Wednesday’s gains, down 1.07% early in the day.

This morning’s slide was in response to the losses in the U.S equity markets on Wednesday, with the Dow having coughed up sizeable gains in response to the more hawkish than expected minutes that drove 10-year Treasury yields to 2.95%. At the time of writing the Dow futures was down 152 points.

It was a different story for the CSI300 and ASX200, which were up 2% and 0.18% respectively, with China returning after the Chinese New Year holidays and playing catch up.

The Day Ahead:

Following softer February prelim private sector PMI numbers on Wednesday, macroeconomic data out of the Eurozone this morning includes Germany’s Ifo Business climate Index figures for February and France and Italy’s finalized inflation figures for January.

After the weaker ZEW Economic sentiment figures released on Tuesday that weighed on the EUR, there could be more pressure on the EUR this morning should the Ifo numbers be in line with or worse than forecasted. Any major moves in the EUR may be on hold however, with the ECB’s monetary policy meeting minutes scheduled for release this afternoon.

We’ve seen the markets interpret the latest FOMC minutes as more hawkish, particularly when considering the minutes did not consider the January wage growth and inflation figures, so it will be interesting to read the ECB’s take on policy.

Any talk of lifting deposit or interest rates would certainly give the EUR a boost and put monetary policy divergence back in the EUR’s favour, though the markets may have to make do with discussions on the asset purchasing program timeline and inflation.

At the time of writing, the EUR was down 0.08% to $1.2274, with direction through the day not only hinged on today’s stats, but also the ECB minutes this afternoon.

For the Pound, economic data scheduled for release this morning includes 2^nd estimate 4^th quarter GDP and business investment figures. Based on forecasts, 2^nd estimates are expected to be in line with 1^st estimates, which should provide some support for the Pound that has been on the back foot since yesterday’s employment figures. Carney and the team provided limited upside for the Pound during the inflation report hearings, with the markets now taking more interest in the macroeconomic data than in previous months.

Direction through the day will ultimately depend upon sentiment towards BoE Policy and Brexit, with the general view being that the BoE may still need to make a move in the coming months to manage inflationary pressures, assuming that the British government can garner a favourable transition deal with the EU.

The Pound was down 0.07% to $1.3909 at the time of writing.

Across the Pond, economic data is on the lighter side, with stats limited to the weekly jobless claims figures. Following the FOMC meeting minutes, the Dollar has been on the move and, with data on the lighter side, will be under the influence of FED chatter, with FOMC voting members Dudley and Kaplan scheduled to speak this afternoon.

With the January FOMC meeting taking place before the January inflation and wage growth figures, the minutes could have been more hawkish, so how FOMC members view the economy and inflation following the January figures will be of greater significance than the minutes.

FOMC voting member Kashkari, speaking earlier this morning, said that he was not so concerned with current government debt levels and near-term demand for U.S notes. How the auctions perform will be of some influence however and the markets are certainly on the bearish side from that stand point.

At the time of writing, the Dollar Spot Index was up 0.11% to 90.101 as 10-year yields held at 2.94%, just shy the latest 4-year high 2.95% hit on Wednesday afternoon.

For the Loonie, December retail sales are due for release this afternoon, which should provide the Loonie with some support, after falling back to $1.27 levels for the first time since December against the U.S Dollar on Wednesday.

At the time of writing the Loonie was up 0.08% to C$1.2693 against the U.S Dollar.

This article was originally posted on FX Empire