By Alex Edwards at UKForex, an international money transfer service
The week was all about USD strength.  At the FOMC meeting on Wednesday, the US Fed announced a further $10 billion taper to their asset purchase program, much as expected. In her accompanying statement, Fed Chair Janet Yellen said that it would be a considerable time between the central bank ending QE and initiating the first US rate hike, but that considerable time could mean only six months – markets had previously been pricing in a larger time gap.Â
In result, it now seems possible rates will rise as early as the first quarter of 2015 vs. previous expectations for the first rate rise in the fourth quarter of 2015. The USD gapped higher on her comments, and cable fell back through 1.66 to a low of 1.6510. Likewise, EUR/USD fell through stops around 1.38 and traded to a low of 1.3760on Thursday. In other news, the Fed also eliminated the 6.5% unemployment threshold, but left its growth, unemployment and inflation forecasts unchanged for 2014.
In the UK, unemployment data printed in line with expectations at 7.2%. Average earnings and claimant count data, which came out at the same time, beat market forecasts, but investors were reluctant to bid cable higher simply on these numbers, especially as risk appetite looked – and continues to look – highly sensitive to developments in Russia and Ukraine.
The Bank of England MPC Minutes were also released on Wednesday and, unsurprisingly, showed that members voted 9-0 in favour of leaving the UK base rate and asset purchase target unchanged. As expected, the UK Budget failed to have much of an impact on currency markets. Chancellor Osborne said that the UK economy was recovering faster than forecasts, with OBR forecasts for 2014 GDP growth rising to +2.7% vs. previous forecasts for +2.4%, and deficit forecasts for 2014/15 falling to 5.5% of GDP vs. 5.6% previously.
In Europe, German ZEW data printed weaker than market forecasts, and whilst Russia/Ukraine tensions built throughout the week, the euro remained fairly resilient. It was not until the FOMC statement (and USD strength) that we saw a sell-off in the pair. Both AUD and NZD have remained strong throughout, largely as a result of respective monetary policy expectations and improving local data.
Next week, sanctions inflicted on Russia and reaction to these sanctions are probably going to dominate the headlines, and these developments will have the potential to upset financial markets. In terms of upcoming data, UK inflation is due on Tuesday and EZ manufacturing on Monday while the calendar is a little lighter in the US.
