Week Ahead in FX: Cautious Fed Hurts Dollar after ECB Bazooka

The Central Bank Kept the US Interest Rate Unchanged and Pulled Back Rate Hike Forecasts

Central banks around the world are running out of options to boost growth. The European Central Bank (ECB) over delivered on March 10 in a better than expected easing monetary policy action. The EUR did not react as expected and appreciated after comments from ECB President Mario Draghi and is now higher after a dovish Federal Open Market Committee (FOMC) statement delivered by the U.S. Federal Reserve.

The release of the FOMC statement and economic projections put downward pressure on the U.S. dollar. The USD was weaker across the board versus majors with commodity pairs (AUD,CAD and NZD) recovering after the oil price surge. The statement by the U.S. Federal Reserve was interpreted by the market as more dovish than expected. The Fed had been optimistic in signalling 4 rate hikes in 2016 and now the forecasts have pegged them closer to the market estimates of 2 rate hikes.

Organization of the Petroleum Exporting Countries (OPEC) members and non members have announced a date for their output freeze summit on April 17. According to the OPEC president the producers of 73 percent of crude will support the initiative. The news has boosted the price of oil even as current supply is far outstripping global demand.



The EUR has advanced 1.51 percent versus the USD in the past week. The surge of the single currency came at a time when the opposite was the expected after the ECB delivered an announcement to extend its stimulus package. The pair is trading close to the 1.13 price level and continues to be a threat to break it again as the dovish comments from the FOMC made it clear that the Fed is in no rush to hike interest rates in 2016. The U.S. central bank can afford to be patient as it waits for the economy to force a hike. The ECB on the other hand is almost out of options as the biggest takeaway from the market was not the size of the QE additions, but the comment from President Draghi that negative rates will not be the focus going forward fearing the consequences on the banking system.

Next week is for the most part free of central bank intervention. The aftermath of the first two weeks in March will continue to be felt throughout the forex market. Monetary policy divergence will have policy makers try to amend the market’s reaction through comments during the week. Some of the focus will be on economic indicators.

Germany is the engine of growth in the European Union, but has started to resist the easing policies of the ECB. There is a high likelihood that the lack of unanimity of the ECB bazooka in March was the result of German votes against the measures they have so openly criticized. Ito Institute will release its survey results on the German business climate on Tuesday, March 22 at 5:00 am EDT. The survey index has been dropping since December as the biggest economy in the EU is not immune to regional ills as the leading indicators shows. Institutional investor survey ZEW will be released the same day at 6:00 am EDT. The survey has remained on the optimistic scale, but the current level although beating the forecast is still just 1.0 when pessimism starts at 0.

U.S. crude oil inventories released weekly on Wednesday at 10:30 am EDT will once again put energy prices in the spotlight. The output freeze deal has been largely based on promises as no official agreement has been made. The more crude inventories grow the higher the pressure for producers to commit, or face another tumble in the price of oil.

Forex Market events to watch this week:

Tuesday, March 22
1:30 am AUD RBA Gov Stevens Speaks
5:00am EUR German Ifo Business Climate
5:30am GBP CPI y/y
6:00am EUR German ZEW Economic Sentiment
Wednesday, March 23
10:30am USD Crude Oil Inventories
5:45pm NZD Trade Balance
Thursday, March 24
5:30am GBP Retail Sales m/m
6:15 am EUR Targeted LTRO
8:30am USD Core Durable Goods Orders m/m
8:30am USD Unemployment Claims
Friday, March 25
8:30am USD Final GDP q/q

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, he established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza