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| Bank of Japan Governor Kuroda |
Last Wednesday evening, a more dovish
than expected Federal Reserve weakened confidence in the USD. Although the
Federal Reserve continued to taper their Quantitative Easing stimulus by a
further $10bn, the US central bank surprisingly downgraded their economic
growth projections for 2014. Beforehand, speculation emerged that the Federal
Reserve would actually upgrade economic projections during the FOMC minutes
(following Yellen’s acknowledgement at a public speaking event in New York
during May that US economic growth was set to accelerate throughout the latter
half of 2014). In reference towards why the Federal Reserve downgraded their
2014 economic growth projections, the central bank admitted that the adverse
winter weather period the United States faced over the New Year, had a larger
detrimental effect on the US economy than they first envisaged. Overall, the US
central bank are now projecting their economy to expand between 2.1% and 2.3%
this year, a considerable decline from the 2.8% to 3% forecasted in March.
Janet Yellen inspired further USD
weakness during her live press conference address, when she refrained from
offering any indications regarding what timeframe the Federal Reserve would
consider raising interest rates. Previously, Yellen had indicated that this
could happen around six months after the Federal Reserve concluded their
Quantitative Easing program. Generally, Yellen maintained a dovish tone
throughout her press conference. For example, despite the US employment sector
making substantial progress over the past few months, (the US economy has now
regained all of the 8.7 million jobs lost during the recession and for the
first time in nearly 15 years, the US economy has added over 200,000 jobs to
their payroll for four consecutive months) Yellen identified that the US
employment sector was still underperforming. All in all, the dovish Federal
Reserve tone contributed towards the EURUSD reaching a two-week high, the
AUDUSD recovering all losses from a dovish RBA minutes release two days prior
and the GBPUSD finally advancing to a new 5-year high.
Moving on to the United Kingdom,
although the GBPUSD finally advanced to a new 5-year high, the advancement
occurred in a slightly more unorthodox manner than many were expecting. Since
BoE Governor Carney hinted nearly two weeks ago that the BoE might increase
interest rates sooner than the markets expect, anticipation was high that
either the UK inflation levels had reached the BoE 2% threshold target, or a
member of the BoE’s MPC (Monetary Policy Committee) had voted in favor of a UK
interest rate increase during the latest BoE meeting. Neither of these
hypothetical situations materialized. In fact, UK inflation CPI fell to a new
5-year low, with inflation increasing at an annualized 1.5%, and the BoE
minutes release showed that the BoE’s Monetary Policy Committee still voted 9-0
in favor of maintaining interest rates at a record-low 0.5%. In reference to
when the GBPUSD advanced towards a new 5-year high, it occurred after the
Federal Reserve weakened the USD last Wednesday evening.
Since then, the GBPUSD has depreciated
slightly. BoE Governor Carney and three members of the Monetary Policy
Committee (MPC) testified in front of the UK Parliament Treasury Committee in
London and specified that there is still no confirmed timeframe regarding when
the BoE may increase interest rates. In fact, Carney specified that when the UK
rate hike occurs, it will be encouraged by data driven economic data, such as
the UK unemployment rate extending below 6% and a noticeable advancement in UK
average wage growth. Domestically, the BoE are now being criticized for sending
contradictory messages regarding when the BoE will raise interest rates. Before
Tuesday’s testimony to the UK Parliament Treasury Committee, 80% of economists
had predicted an interest rate hike in November. Following Carney’s admission
that a UK rate hike will data driven, rather than time specified, economists
are delaying their expectations for a UK interest rise until February
2015.
In reference to the EU economy, with
the exception of confirmation that EU inflation increased at an annualized 0.5%
last month, economic releases last week were low in quantity. However, the EU
economy still remained in the news headlines. During an EU Finance Ministers
meeting in Luxembourg, Christine Lagarde (Head of the International Monetary
Fund) announced that the EU economic recovery had not been robust, or
sufficiently strong. Lagarde also signaled that there were signs that the EU
economic momentum was slowing, and the ECB needs to consider introducing asset
based purchases (Quantitative Easing), if inflation levels remain low.
Unfortunately, since Lagarde’s
comments, there have been further indications that EU economic growth is
slowing down. The latest Markit Purchasing Manager’s Index (PMI) showed that EU
economic activity in June slowed to its weakest rate in six months. The PMI for
private sector activity this month fell to 52.8, from 53.5 in May.
Additionally, Monday’s EU Manufacturing and Services PMI release displayed
further signs of contraction in France, while Germany’s IFO estimates in June
failed to meet expectations.
Elsewhere, for the second consecutive
month, a dovish RBA minutes release encouraged AUDUSD weakness. Last month, the
Reserve Bank of Australia weakened confidence in the Australian currency by
announcing that the Australian economy was set to enter a period of weaker than
expected economic growth. Although this month’s RBA minutes release made some
reference towards a similar message, the Australian Central Bank also announced
its displeasure with an overvalued AUDUSD.
Finally, Bank of Japan Governor Kuroda
announced during a press conference in Tokyo that the Japanese economy was
recovering moderately and he expected Japanese inflation levels to continue to
increase throughout 2014. However, Kuroda admitted that a sales tax imposed in
April had encouraged some distortion with recent Japanese economic releases.
The BoJ is set to continue issuing monetary easing until the Japanese economy
is recording a consistent 2% inflation rate. The latter statement refutes an
emergence of speculation last month that the BoJ was already internally
discussing how to withdraw from its Quantitative Easing program.
What to Watch this Week:
I am expecting the final confirmation
of United States first quarter GDP on Wednesday to attract the majority of
attention over the upcoming days. Following the Federal Reserve’s surprising
announcement during last Wednesday’s FOMC minutes that they were downgrading
their economic growth forecasts for 2014 (due to the adverse winter weather
period), it is possible that Wednesday’s GDP release will show that the US
economy contracted further than originally anticipated during the 1st
quarter of 2014.
Other than Wednesday’s US GDP release,
market volatility will likely witness an increase from Thursday evening
onwards. On Thursday evening, the latest Japanese CPI (inflation) readings are
released. This is followed by UK and France GDP announcements on Friday.
France’s GDP release has the potential
to raise a few eyebrows. We are expecting French Gross Domestic Product
(Quarter on Quarter) to be confirmed at 0.0%, but their services and
manufacturing PMI’s have contracted for several consecutive months and this
could consequently correlate towards a worse than expected GDP figure.
Written by Jameel Ahmad, Chief Market
Analyst at FXTM.
