The US FOMC announced that its quantitative easing programme would be reduced, in line with market expectations. But what made the US dollar jump by nearly a per cent against most major currency crosses was the shift in the bank’s forward guidance communique. Not only did the bank drop its 6.5 per cent target for unemployment, but also policymakers said that they would use a broader array of measures to determine whether the time was right to raise rates. Secondly, Federal Reserve chair Janet Yellen put a much more specific time frame on when a rate increase could occur. Her comments brought forward expectations by three to six months, which gave the US dollar its boost. Sterling tried to recover from losses after the government presented this year’s budget which maintained a path of austerity. Strong economic data released showed a steady unemployment rate and a steep decline in claimant count figures, which helped to mitigate losses for the local currency.
Sterling
Sterling recovered some losses on the back of strong economic data, but then was unable to hold on to those gains against a resurging US dollar. Sterling dropped as the Chancellor of the Exchequer George Osborne continued to set out a path of austerity despite improving economic conditions in his budget reading.
US dollar
The FOMC announcement was more or less in line with expectations in that the central bank cut its Quantitative Easing programme by another $10 billion to total $55 billion. If they keep this up, QE should be finished in about five months which is significant because, for the first time ever, Yellen attached a time frame to words describing ‘significant period’. Yellen said that rates could move about six-month after QE is wrapped up. That brought forward expectations for rate increases, which sent the dollar higher, equity markets lower and bond yields up.
Euro
The euro saw nearly a one per cent decline after the FOMC made its policy statement, which moved the dollar higher. Economic data in Germany is likely to reflect soft price pressures, which could be a reminder of the diverging courses set out between the European Central Bank and FOMC. Initial euro weakness could be a selling opportunity for exporters.
Swiss franc
The Swiss currency opens near a one-month low against the US dollar. The clear focus is going to be on the Swiss National Bank’s policy statement, as, given the more upbeat BoE minutes and the slightly more hawkish sounding FOMC, it would really be a big surprise to see the SNB do anything other than maintain their current policy position.