In contrast to a news conference following her first FOMC meeting as Federal Reserve chairman, Janet Yellen gave what many considered a very dovish speech on Monday, highlighting the slack in the American economy. At a speech in Chicago she said that the US economy and labour market were far from healthy. She stressed that “extraordinary commitment is still needed and will be there for some time.”
Her comments this time around were far “closer to reality”, given that the jobless rate currently stands at 6.7 per cent, with Fed officials considering the 5.2 – 5.6 per cent as the normal range. The annual inflation is also significantly below the Fed’s target, currently standing at just above one per cent versus the official two per cent target. Last month, investors were astonished by Yellen’s suggestion that an interest rate hike could come next year.
She said there was still “considerable” slack in the economy and labour markets, which remain short of the Fed’s goals. Her remarks dampened expectations for a sooner-than-expected interest rate hike, and global shares and other riskier assets surged higher. The dollar eased off a two-week high against a basket of its major rivals.
In fact, the Dollar Index slipped to 80.022 from a two-week high of 80.296. Despite Yellen’s dovish comments which added pressure to the greenback, the buck held steady against the Japanese yen and the euro. EUR/USD rose to 1.3802 but eased back to 1.3790 after data on Monday showed an inflation estimate from the euro area was softer than expected, piling more pressure on the European Central Bank to fend off the threat of deflation.
Today’s ECB meeting will be closely watched by forex investors. The main focus will be on whether European policy-makers will introduce any new stimulus measures. From a technical perspective, EUR/USD remains bullish, with the price managing to stay above 1.37. With chances of a Fed rate hike in 2015 now reduced to minimal, only a move by the ECB to ease policy further can put the brakes on the pair.
However, comments by ECB council member and Bundesbank president Weidmann have diminished expectations that the ECB will intervene. Weidmann said the eurozone was not in a deflationary cycle and that policymakers shouldn’t overreact to slowing inflation which may prove to be temporary. A report on Germany’s unemployment also dampened speculation for more stimulus by the ECB. Germany’s jobless rate slipped to 6.7 per cent from 6.8 per cent. Without any new easing measures by policymakers from the euro area, EUR/USD may resume its uptrend and test this year’s high by 1.3967.
USD/JPY stuck close to its three-week high hit at the start of the week. The pair held steady around 103.38 at the time of writing on Tuesday after data from Japan earlier in the day disappointed and kept alive expectations that the Bank of Japan may have to ease policy further to allow the pace of economic expansion to improve. A break of 103.76 should pave the way for more gains towards this year’s high of 105.44, touched on the very first trading day of 2014.
The yen has come under heavy pressure as risk appetite improves, with commodity currencies inflicting most of the pain. Hopes of fresh stimulus from China have boosted demand for higher-yielding assets and weighed on the safe-haven yen. The New Zealand dollar touched a six-year high against the yen at 89.93 on Tuesday. The kiwi has been given a strong boost this year by the Reserve Bank of New Zealand which became the first central bank of a developed country to normalise policy. From here, the 90 level is all that stands in the way for the pair to test its pre-global crisis high of 91.46.
The Aussie spiked above 0.93 against the greenback, for the first time in four months after the Reserve Bank of Australia left rates unchanged at 2.50 per cent as expected. It gave up its gains shortly after as the RBA said the currency remains high by historical stand-ards and that a record-low benchmark will help sustain growth. AUD/JPY was up to a 10-month high by 96.06 and remains in a strong bullish configuration.
Upcoming FX key events
Today: EZ PMI services, EZ ECB interest rate decision and US ISM Non-manufacturing composite.
Tomorrow: US non-farm payrolls, US unemployment rate and Canada’s net change in employment.
Technical key points
EUR/USD is bullish, target 1.4000, key reversal point 1.3700. EUR/GBP is neutral. USD/JPY is bullish, target 105.50, key reversal point 101. GBP/USD is bullish, target 1.6900, key reversal point 1.6250. USD/CHF is bearish, target 0.8575, key reversal point 0.9000. AUD/USD is bullish, target 0.9450, key reversal point 0.8900. NZD/USD is bullish, target 0.8850, key reversal point 0.8400.
Please feel free to send any comments or feedback regarding our articles on trading@rtfx.com.
Visit RTFX for additional forex news and demo trading account information.
RTFX Ltd is licensed to conduct investment services business by the MFSA. This information does not constitute advice, should not be relied on as such to enter into a transaction or for any investment decision and is provided for information purposes only.
www.rtfx.com
Emman Xuereb is a trader at RTFX Ltd.