USD higher after FOMC

January 29, 2015

The US dollar recovered some lost ground in early trade yesterday after suddenly reversing course and selling off at the beginning of the week. It pushed higher against most of the majors, although it remains stuck in a narrow and sideways range against the Japanese yen.

The greenback has rallied sharply since May last year when it hit its lowest point in nearly 2 years against the euro. Since then the EURUSD has lost around 20% of its value. This has been the result of the divergence in the economies of the US and Euro zone and market expectations concerning the reactions of the respective central banks. Last Thursday Mario Draghi, president of the European Central Bank (ECB) finally came good on his promise (or threat) to “do whatever it takes” to save the single currency. It was announced that the ECB would soon engage in a €60 billion per month bond purchase programme. This stimulus is effectively open-ended as Mr Draghi said it would remain in place until Euro zone CPI approaches the ECB’s preferred 2% target rate. The news put additional downward pressure on the single currency. Then the EURUSD hit a fresh eleven-year low on Sunday evening as exit polls showed that the anti-austerity Syriza party was on course to win the largest number of seats in the Greek General Election. However, this proved to be a turning point for the single currency as it then bounced sharply. There was undoubtedly some profit-taking going on and this was exacerbated by speculation that the US Federal Reserve may put a dovish slant on its first statement of 2015.

In fact, last night the US central bank managed to speak out of both sides of its mouth at the same time. The FOMC kept in the phrase from the last statement about being “patient” in raising rates (so far, so dovish). But it also said that economic activity had expanded “at a solid pace” since its last meeting in December and that while inflation may have further to fall, it should pick up over the medium term as employment continues to improve. The Fed also expects low energy prices to be temporary. All in all, the statement was less dovish than expected and after a brief pause the US dollar continued its ascendancy.

Today’s significant economic data releases include German CPI, German Unemployment and Euro zone money supply and private loans. In addition we have US weekly jobless claims and pending home sales.

David Morrison

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