The USD got a shot in the arm this week with a little help from a central bank. Last month, the Federal Reserve gave the buck a jolt when the Federal Open Market Committee (FOMC) meeting minutes showed an optimistic Fed in the face of a possible U.S. economic slowdown. This time it was comments from European Central Bank (ECB) officials that impacted the currency market. Benoît Coeuré and Christian Noyer, French members of the ECB’s executive board, revealed details about the massive quantitative easing (QE) program launched by the central bank that put pressure on the EUR.
Coeuré mentioned that the ECB will front-load its debt purchases to avoid an excess of bond buying during the quiet summer trading days. And Noyer, the head of the French central bank, stated that the ECB could go beyond the QE amounts already announced in order to hit its inflation target. These two statements reassured markets of the commitment from European policymakers to stick with their stimulus plans until Europe’s economy shows signs of sustainable growth.
The U.S. economy is losing steam as a stronger USD is sapping the momentum away from growth and putting the Fed in a tough position. The American central bank has said that the timing and schedule of interest rate hikes is data dependent. The statement serves as a deflector as time and again analysts and journalists ask members of the Fed to show their hand. The U.S. economy had a first quarter to forget, and so far, the only silver lining is that the negative factors such as the weather and lower energy prices are deemed transitory by monetary policy members. The FOMC minutes for April will serve to shed some light onto the debate over how permanent the slowdown really is, and if the Fed can do anything but wait until the economy recovers. Chicago Fed President Charles Evans said on Monday that although he sees an early 2016 rate hike if inflation moves up and the softness of the first quarter is temporary, we could still see it as soon as June. This potential for a wider interest rate divergence is driving the USD pairs.
Bank of England Likely to Stand Pat
The Bank of England (BoE) has emerged from its purdah period – a means to prevent public speculation about the bank’s Monetary Policy Committee’s (MPC) decisions – to avoid affecting the outcome of the U.K.’s general election that resulted in a Conservative majority.
Great Britain’s central bank has made up for lost time by grabbing headlines after the elections results were announced. After holding rates at a record low, the BoE proceeded to cut the growth forecast for the U.K. economy. The forecast now is for a 2.5% growth versus a 2.9% prediction earlier in the year. The minutes from the MPC meeting will be published ahead of the FOMC minutes and will show a unanimous decision to hold rates, as various members have stated that conditions have worsened, and are far from the levels of optimism shown before October 2014. There hasn’t been a major change in the British macroeconomic picture and MPC members will do a repeat of their votes from last month.
The positive U.S. housing starts compounded on earlier comments from the ECB to drive the dollar higher ahead of the FOMC data. There is almost no expectation for the Fed to have a hawkish view on the economy, so market expectations are centered on the dovish side of the spectrum. Neutral-to-slightly dovish seems to be the most likely outcome, and one that could help the USD keep gaining ground on other currencies. A June rate hike will not be ruled out until after the FOMC meeting is finished that month, but the market is already pricing it as very unlikely.