The USD fell for a third week in a row after questions arose about the growth of the American economy, and its ability to fend off the negative effects of a strong currency.
The Federal Reserve has expressed its concerns about the strengthening greenback on a number of occasions and the potential impacts various international economic events may have on the U.S. economy. The central bank has made it very clear that it won’t make any move on benchmark interest rates until June at the earliest. That leaves investors again looking to the latest Federal Open Market Committee statement for any change in the language; any hint that could suggest a change is forthcoming.
Economic Data Provides Few Clues
Predictably, recent market analyst and economist surveys show the majority expect the Fed’s first interest rate hike to come later in the year. Fed members’ comments have, as usual, been varied, and it’s clear that there is no unanimous opinion on when the central bank should start tightening monetary policy. Member comments range from a June rate hike all the way to mid-2016 depending on where the hawk/dove spectrum happens to fall. Of late, U.S. economic indicators have been disappointing. Weak factory activity, business investing, industrial production and new-home sales, all have been driving the USD down even while Europe is immersed in the Greek debt-negotiating debacle.
The Fed’s hawks and doves have interpreted negative data differently. The more hawkish members see the winter data as transitory, meaning that as warmer weather starts to roll in, the economy will thaw and consumers will loosen their purse strings. Doves, on the other hand, see this as a sign that the economic recovery could not sustain a borrowing cost increase without putting in jeopardy the growth of the U.S. economy.
Birds of Prey Still Circle
Chair Janet Yellen has stressed time and time again that the central bank’s decision is fully data dependant. There is no predetermined schedule for when the first rate hike will be launched as it all hangs on the performance of the U.S. economy. In the past month, the data has not pushed forward the rate hike agenda as consumer confidence and retail sales continue to disappoint. Employment — once the best evidence of a full recovery — has stalled, and doubts remain about the wisdom of raising rates with such a low level of inflation.
The FOMC meeting this week will not show a large shift in monetary policy but the U.S. dollar could be boosted if the rhetoric remains optimistic about the growth of the economy. The FOMC statement will not include a date on when the market can expect a change in monetary policy. But if there are no significant changes to the language that has already seen the removal of phrases and words such as “considerable time” and “patient,” the market will take that as a vote of confidence in the economy, and the USD will subsequently appreciate.
A more dovish FOMC statement will keep the pressure on the USD and further depreciate it versus major pairs. The transitory label on the U.S. economy’s underperformance in the first quarter has mitigated some of the negative effects of the weaker data, but a shift in interpretation by the Fed from temporary to a more systematic malaise could spell another USD selloff, particularly if policymakers show a lack of confidence in the economy. This is unlikely given past statements, and the fact that even within the mix of Fed members’ comments, there are still some voting hawks at the FOMC.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.