Week in FX Europe – BoE Shake Up No Match For Yellen’s FOMC

Geopolitical risk continues to be high after Crimea’s overtly pro-Russian vote in Sunday’s referendum. The fact that energy and other commodities had high stocks before the Ukraine-Russian turmoil decreased the effect that it had on prices. Russian stock markets where the hardest hit this week with western counterparts unfazed and even boosted by President Putin’s words about no further Ukrainian region expected to join. The EUR/USD stood mostly in a very tight range around 1.39 before the US Federal Reserve’s FOMC.

The Bank of England governor announced his shake up of the Old Lady. Answering two of the biggest complaints about the central bank Carney appointed a new Chief Economist and a Deputy of Banks and Markets. The fact that the market was calling out the BoE for being out of touch with the economy and having the wrong forecasts explains the first appointment. The biggest loser in the shake up was MPC member Fisher who oversaw one of the people who have been suspended in the ongoing FX manipulation probe. This probably means that Fisher will be out when his term ends.

Sanctions against Russia continue to rise. The US has used the more aggressive language, but in the end both the EU and the US have been limited to sanctions on individuals in the periphery of the conflict and no direct economic sanctions for Russia. The US has nothing to lose as trade with Russia is small. Russia does not hold that much US debt that could hurt the US if they decide to sell. Europe on the other hand has a much co-dependant relationship with Russia. The Europe needs Russian energy. Germany in particular accounts for most Russian exports to Europe. Russian in exchange needs the profits from those energy exports to sustain its economy. German sanctions would hurt Russia, but would also impact the rate of growth of the economy and Europe as the teuton nation is the engine of the region.

The Janet Yellen era at the United States Federal Reserve has officially begun. Her first Federal Open Market Committee was memorable. The actual FOMC statement was what the market has come to expect from central bank communication: Optimistic, but cautious. The expected $10 billion added taper continues the trend set by Bernanke in the December FOMC. What took markets by surprise was Mrs Yellen’s first post FOMC press conference.

The Fed chair said that the quantitative easing program would could end by fall if the current pace continues to be constant and rates could be higher six months after that. Nowhere in the FOMC statement did that timeline appear. In fact the actual release foresaw low rates for “considerable time”. Yellen surprised by giving a closer date that most analyst expected given other Fed members previous statements.

What begun last summer with another apparent off script comment from Ben Bernanke regarding tapering seems to be moving forward. The era of record low rates around the world seems to be over. Emerging markets were particularly hard-hit by the tapering announcement. This time around the USD has made big gains against all currencies across the board.

The Fed chair word’s dropped the EUR/USD below the 1.39 range and well into 1.37. It has seen retreated slightly to above 1.38. Deflation and the strong euro continue to be a concern for the European Central Bank. Thanks to Yellen they have to focus only on deflation for now.



* GBP Consumer Price Index
* USD Durable Goods Orders
* JPY National Consumer Price Index
* EUR German Consumer Price Index
* GBP UK Gross Domestic Product


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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, Alfonso Esparza 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 has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. 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