Post FOMC, BOE and ECB where are we now? In short eagerly awaiting tomorrow’s US Non-Farm payrolls. However for an insight into how the currency markets may trade over the summer months we should probably take a quick look back at what happened at these central bank meetings over the past 24 hours.
Firstly the FOMC – If you were to look in great detail you would probably come to the conclusion that last nights statement is mildly more dovish than the June statement, but for the most part, there was little new information. The Fed is keeping its $85 billion per month purchase pace and there was no mention of tapering and no changes to the language in the paragraph discussing asset purchases. Additionally, the Fed kept the thresholds for raising the funds rate the same, with the unemployment rate still at 6.5% and inflation 1-2 years out still at 2.5%.
Then came the BOE today. The market got what it was expecting with the policy rate (0.50%) and the level of asset purchases (£375bn) left unchanged. However for me the most important aspect of today’s announcement is the absence of a statement as this may indicate that the MPC didn’t feel a need to talk down money market rates further this month after the issuance of a statement last month at Mark Carney’s first BOE meeting.
Finally we got the ECB take on things. Mr Draghi started with keeping his dovish tone from the last meeting, as expected. However no talk about rate cuts was mentioned. So slightly less dovish than some in the market were looking for. He was somewhat vague regarding forward guidance. The problem here is that the forward guidance is not really based on anything other than the idea that the ECB rates stays low or lower as long as it sees inflation risk as moderate. That’s the softest form of forward guidance and the markets are uncomfortable with this sparsely guided path.
So where does that leave us now in trying to determine when and in which direction the currencies will move?
First up is tomorrow’s US Non-Farm payroll (NFP) and after yesterdays strong ADP number coming in at 200k and with the previous months number revised up this certainly looks good for tomorrows NFP. I would say anything below 175k would certainly disappoint, especially if the unemployment rate remains at 7.6%. It is worth noting that there is also a Septembers NFP number to digest before the next FOMC meeting on top of the minutes of yesterday FOMC meeting (released 21-Aug). Therefore tomorrow’s reaction in the currency markets could be somewhat subdued relative to previous months, unless we get big move down in the unemployment rate or big miss up or down on the 185k additional new jobs that the market is expecting. I tend to favour a good NPF (200K) and the employment rate moving to 7.5% giving a slightly stronger USD into the end of the week pushing the EURUSD back below 1.3200.
Next up will be the UK as the markets focus will be firmly fixed on next Wednesday (07-Aug-13) Inflation Report and the accompanying response to the Treasury’s request for the central bank to provide an assessment of the case for adopting some form of forward guidance, including the possible use of intermediate thresholds. The outlook for GBP will be largely down to the guidance we receive. Looking at this weeks trading it certainly feels as if the market is bracing itself for weaker GBP post 07-Aug. I tend to favour markets testing the 01-Aug high of 0.8770 and ultimately the 0.8793 (12-Mar-13) high as we approach the inflation report.
Finally with the ECB now on holiday now and the next meeting on 05-Sep-13 the focus will remain on the economic data. This has of late been stronger than forecasted and consistent with the ECB’s view of a rebound later this year. So EURO performance during the month of August which is historically a month for market participants to take annual leave will largely be driven on the performance of key economic indicators. I tend to favour a mixed bag of data out of Europe to slightly positive so expect trading ranges to hold and any moves against GBP and USD to be driven by events in the UK and US.