Equity markets continued to slide while emerging market currencies remain under broad selling pressure after the Federal Reserve delivered its second stimulus taper in two months. The US dollar has advanced against the euro and British pound while emerging market currencies remain under significant pressure.The euro has hit a one-week low against the US dollar after a European Central Bank official, governing council member Christian Noyer, warned of the risks to eurozone inflation from a stronger currency. As a result, markets are likely to pay close attention to German price data before the important inflation print for the wider eurozone. Sterling lost ground and is under pressure against the US dollar after Bank of England Governor Mark Carney remained dovish on monetary policy.
Sterling
Speaking in Scotland about the implications of an independent Scotland, Carney signalled that it would be some time before the UK economy reaches a firm enough footing to raise interest rates from record lows. The pound’s strong start to the year has been fuelled by markets betting on a sooner rate hike than the BoE has been projecting, however, the BoE’s reluctance to talk tighter monetary policy has led to profit-taking on the UK currency’s rally.
US dollar
The Federal Reserve announced that it will be cutting its monthly bond purchases by another $10 billion, taking the total down from last years $85 billion to $65 billion. The reduction was largely expected and priced in by market participants. As a result there was little reaction for the US dollar against its main counterparts such as the euro and British pound although the US currency does open higher. However, the Federal Reserve’s reaffirmation that better US economic data would likely see further cuts “in measured steps” is continuing to weigh on stocks and emerging markets, assets which have attracted strong inflows in recent years on the back of the Federal Reserve’s stimulus.
Euro
The euro has hit a one-week low against the US dollar after a European Central Bank official, governing council member Christian Noyer, warned of the risks to eurozone inflation from a stronger currency. The single currency area is already wrestling with dangerously low inflation inside of one per cent, a level significantly below the ECB’s near two per cent target. Meanwhile, the tapering by the Federal Reserve is supporting the US dollar and weighing further on the euro.