FED and Spain Game Change for EUR

The difference in a word here and there by the Fed has again dragged many EUR bear position back on side. Yesterday’s minutes of the FOMC March meeting were viewed as generally hawkish. The replacing of ‘a few’ by ‘a couple’ of members does not show widespread enthusiasm for doing anything any time soon. If the FOMC ever had that, “Itchy trigger finger,” then Bernanke and company have done a good job in hiding the fact in the minutes. If anything, the minutes at times seemed defensive about the very accommodative posture the Fed has already being adopting.

There was plenty of language downplaying some of the strength in recent US data. The basic message was that the underlying situation appeared to have improved and that additional easing measures were unlikely absent renewed deterioration. Taken at face value, that implies that labor market conditions would have to weaken to justify the Fed’s current policy guidance. It would seem that the bar for more easing in the very short run is quite high. The minutes also showed a new debate emerging amongst officials on whether there is still much slack in the US economy that will keep inflation subdued.

Overall, the well documented minutes seem to be a more hawkish message than that delivered by Bernanke in his speech last week. Was it not a new mandate of theirs to be more transparent in their communication? Talk about trying to scare the EUR bears off the scent. Even though the 2014 policy guidance of keeping short term interest rates at very low levels remained appropriate now, that date could be revised if there were significant changes in the economic outlook. Ever since yesterday afternoon, investors have expressed their disappointment that the fed is unlikely to launch another round of QE by buying back the dollar and offloading risk by liquidating equities and shying away from debt products. Perhaps this is only the beginning for the dollar, the minutes certainly now set the markets up for a more significant “big dollar” reaction if NFP were to surprise us all on the topside this Friday.

The EUR, technically is well supported at current levels (1.3184). There have been some feeble attempts by the single currency to recover from these depths, if working on an hourly oversold bias. However, this morning’s latest Spanish auction should ‘put to rest any lingering doubts whether the LTRO related rally on peripheral debt is over.’ It was a bad auction, bad for debt markets and bad for the EUR. Spain happened to end up selling at the lower end of their range (EUR2.5b-3.5b), delivered product at higher average yields and a low bid-to-cover ratio point to investors “repricing periphery risk.” This is doing nothing for regional financial health perception. If anything, its making the ECB’s task even harder. The ECB meets later this morning and the markets expect no news and no innovations from the meeting. If anything, on what is transpiring peripherally, expect markets to rebuild ECB easing expectations as their economies struggle. The game change has the markets looking to use upticks as fresh EUR selling opportunities as the underlying bias remains with the bears.

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Other Links:
A divorce settlement for the EZ

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell