Dollar drifts on Fed's lack of optimism

24 February, 2017

FOMC February meeting minutes released on Wednesday failed to provide support for the bulls to manage a sustainable breakout above 101.50. After rising for a while before the release of the minutes, the dollar fell on mixed Fed comments on the need for raising rates.

According to the release, officials expect a moderate increase in inflation, but do not believe that unemployment will stay at current lows (below 5%). Apparently, Trump’s ambitious promises to return jobs to the US citizens did not impress the Fed. The regulator was not optimistic about its projections, eliminating hopes for a March rate hike, although the median consensus still predict three rate hikes this year. According to CME data, rate hike chances dropped from over 30% to 17%. This caused a rout in bulls’ rally, while the government’s silence on the tax programme questions the dollar’s steady growth in the short term.

The progress of the leading presidential candidate in France Le Pen continues to put pressure on the euro, although investors’ anxiety eased as Francois Bayrou quitted the race, increasing winning odds for Emmanuel Macron. After a breakout of the 1.05 level on Wednesday, the currency bounced back to the level of 1.0560, where it trades at the time of writing.  Populist sentiment is growing in France and the risk of the right-wing candidate coming to power suppresses the European currency’s resistance. Chances of falling below the key level of 1.05 are quite high, provided that there is an appropriate catalyst on the political arena, for example, results of a new voting poll. Economic data continue to remain on the sideline, as growth signs in the euro area can be affected from a weak currency because of the growing political instability in the bloc.

The British pound dropped below 1.25 on weak GDP data as investors finally lost faith in the policy tightening by the Bank of England. Two factors – the risks of a hard Brexit and economic data missing the official forecasts, shift timing of rate increase for an uncertain period depriving the pound of the main growth driver. The data of Parliament vote on Brexit looms and the fate of the pound will depend entirely on whether pro-European amendments are adopted or not. The currency is projected lose poise again declining to 1.24 in the short term with selloff accelerating below the support level.

The British pound dropped below 1.25 on weak GDP data, as investors finally lost faith in the Bank of England’s tightening policy. The risk of a hard Brexit and economic data missing official forecasts, shift the timing of a possible rate hike for an uncertain period, thus leaving the pound without a growth driver. With the Parliament’s vote on Brexit looming, the fate of the pound will depend entirely on whether pro-European amendments will be implemented or not. The currency is projected to lose poise once again, declining to 1.24 in the short term, with the selloff accelerating below the support level.

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