Forex Weekly News for Week of March 13, 2017
Stronger Dollar a Reality
Economic cycle moves on
The dollar fell to an eight-week low against a stronger Euro yesterday following an employment report which showed an increase in job creation but a slower than expected increase in wages.
The market had been getting steadily more overbought dollars as the week wore on and the strong jobs report provided the catalyst for profit taking on long positions.
The U.S. economy created 235k new jobs in February comfortably beating the markets expectation. The average 209k new jobs over the past three months is well above the FOMC’s model for spurring growth in the economy. The January figure also was raised by 10k to 238k. Given the up to 20% revisions seen recently, the fact that the January data was revised up even by a relatively small amount will also have caught the Fed’s attention.
The one cloud on the horizon is the stubbornly low growth in wages that continues to cause concern. Average hourly earnings rose at just 0.2% lower than forecasts of 0.3%. This figure should start to rise as full employment is reached and jobs become more scarce and shouldn’t therefore deter the Fed.
A hike in interest rates all but certain now when the FOMC meets next Tues/Wed. Janet Yellen has already commented that if employment and inflation data are on trend, the Fed believes that the conditions are right for a hike in rates.
EU also considering rate hike?
At their meeting on Thursday, the Governing Council of the European Central Bank appears to be also considering a hike in rates. This follows a report that the they had discussed the possibility of raising interest rates before the end of its quantitative easing program. It seems that more hawkish (German) members of the council believe that the Eurozone economy is reaching the point where it could stand a hike in rates.
An interesting counterpoint to this is the protest of the Polish Prime Minister at last week’s EU Heads of Government meeting over a creeping move towards a “two speed Europe.”
The Euro hit a high of almost 1.0700, a rise of 1.1% and was also 1% stronger against the Pound
A stronger Euro is “music to the ears” of President Trump and Chancellor Merkel but the single currency faces a multitude of headwinds over the rest of the first and well into the second quarter of the year.
Considering the ECB is rumoured to be considering a rate hike, however vague, a speech from the ECB President on Monday will be closely watched for any change in nuance.
Sterling bruised following positive Budget.
The U. K’s Finance Minister delivered his spring budget to the House of Commons on Wednesday.
This outlines spending plans for the next fiscal year and how they will be paid for. There was little of anything other than of academic note for traders.
He raised expectations for growth this year to 2% but was a little more dovish on inflation changing the official view to a peak of 2.7% sometime in mid-2018.
Sterling fell by almost 1% against a stronger Euro. While the pound is facing major political issues over the next eighteen months with Brexit and Scottish independence, the U.K. economy is further along the road to recovery that the Eurozone is and any fall in the pound closer to 1.200 vs. the dollar and 0.8820 vs. the single currency will treated as an opportunity to buy by traders.
Halfway through a major series of events.
The global economy is in the eye of the storm this weekend as last week’s data releases are pored over and next week’s interest rate decisions are now being considered in the light of additional information.
There will be interest rate decisions next week in the U.S., U.K., Japan and Switzerland. The latter two countries have (and will retain) ultra-easy monetary policy where the Swiss use negative rates to stave off inflows into their economy by weakening the currency and Japan fights the threat of deflation.
In the U.S., a rate hike is now all but certain.
In the U.K., the most interest next week, will be in how the MPC votes on a change to rates.
The Governor, Mark Carney is committed to keeping rates as low as possible for as long as possible. He sees the Brexit negotiations as a potential black swan event.
There is a growing hawkish element amongst his colleagues who feel that a wait and see policy may not give the BoE sufficient time to curb inflation if it starts to grow quicker than anticipated.