30/06/2014
Dollar Uninspired by Increasingly Hawkish Fed
- British Pound Responds to a BoE Tightening
- EUR/USD in highs above 1.3650
Though the pace of its retreat cooled this past session, the dollar nevertheless extended its decline. Despite a burst of volatility, EURUSD has kept to its range. Meanwhile, GBPUSD, AUDUSD and USDJPY all seem to be unfazed by their proximity to major technical levels. Under normal conditions, this would likely catalyze to a breakout or reversal in short order. Yet, we know current conditions are far from ‘normal’.
Putting aside the prominent fundamental themes and the enticing technical patterns, the overriding trait of the financial markets right now is activity. Volatility measures have been trending down for months in a systemic slump for fear and speculative opportunity. This is only exacerbated by the seasonal ‘summer doldrums’ which will be particularly draining next week with a Friday Independence Day holiday in the US encouraging liquidity in the financial center to drain well in advance of the actual market closure. It is difficult to normalize even extreme inactivity when there isn’t a market to fuel swings.
Market conditions aside, the dollar’s fundamental appeal improved materially this past session – at least on the relative monetary policy front. The Fed’s first rate hike will not come when the unemployment rate hits a certain level but when inflation pressures the central bank to remove accommodation. The central bank’s preferred inflation reading – the Personal Consumption Expenditures Deflator or PCE – showed a pickup in pace for the headline reading to 1.8 percent with a 1.5 percent uptick in the core.
These are still both below the central bank’s medium-term target of 2 percent, but St Louis Fed President James Bullard remarked that we would likely be above that level next year. In fact, he believed circumstances would necessitate a hike by 1Q 2015. Richmond Fed President Jeffrey Lacker proffered a hawkish view of his own – though not quite as aggressive. Next week, we will see the same high profile rate speculation with NFPs vs tepid market conditions with July 4th.
The Bank of England took steps to curb inflation, in the housing market. Normally, a move to halt price growth would be an interest rate hike; but such a blunt instrument would carry too much collateral damage for the central bank to implement now.
While that first benchmark rate increase is on the horizon, concern over the state of the UK housing sector (a bubble that will go unlabeled by officials) demanded a move now. BoE Governor Mark Carney announced a first step to limit loan-to-income ratios and to refuse loans that fail a stress test (a 3 percentage point rate increase). The stress test insinuates hawkish intentions; but this move also obviates a first hike to answer housing fears.
Following a quiet Asian morning of range-bound trade, the GBP/USD swang up and down amid comments from BoE's Bean, who suggested rate rises are fairly priced at present.
The GBP/USD rose to a daily high of 1.7040 before coming under pressure and retracing completely its intraday advance. The Cable slipped to fresh daily lows at the 1.7010 zone, and was last down 0.13% at 1.7015.
The GBP has been driven by BoE members’ comments over the last weeks, but now attention turns to the other side of the Atlantic as the US will release the nonfarm payrolls data Thursday - a day earlier of usual due to the Independance Day.
The single currency is posting meager gains at the beginning of the week, although enough to lift the EUR/USD to 2-week highs beyond 1.3650.
The pair left behind last week’s highs around the mid-1.3600s despite German Retail Sales disappointed investors in May, contracting 0.6% on a monthly basis and expanding at an annual pace of 1.9% vs. forecasts for a 0.7% and 2.1%, respectively.
The preliminary set of June’s Eurozone CPI figures headlines the economic calendar in European hours. Expectations call for the benchmark year-on-year inflation rate to print at 0.5 percent, unchanged from the prior month. Leading data from Markit Economics pointed to a pickup in regional price growth over the relevant period, with both manufacturing and service-sector companies citing higher oil prices as the culprit.
If this proves to foreshadow an upside surprise on today’s release, the Euro may move higher as traders reduce bets on a near-term expansion of ECB stimulus efforts. Technical positioning underscores the possibility of further EUR/USD gains ahead.
Have a good day!
