Dollar Takes A Pounding

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Market Drivers February 2, 2017
Post FOMC – Dollar starts to weaken
BOE on tap
Nikkei -1.22% Dax -0.45%
Oil $54/bbl
Gold $1212/oz.

Europe and Asia:
AUD Building Approvals -1.2% vs. -2.0%
GBP UK Construction PMI 52.2 vs.53.8
EUR EZ PPI 0.7% vs. 0.4%
GBP UK PMI Manufacturing 55.9 vs. 55.9

North America:
GBP UK BOE Rate Decision 7:00
USD Weekly Jobless 8:30

The dollar was markedly lower in Asian and early European trade today as traders reacted to yesterday’s FOMC statement which offered little hope of any accelerated pace of rate hike.

In its statement the FOMC stressed the gradual pace of tightening. It reiterated, “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. “

The tone of the release suggests that, at least for now, the Fed is much more likely to raise rates only 2 times this year versus 3 times anticipated by some dollar bulls and that has clearly caused disappointment in the market with USD/JPY falling through the 112.50 level in morning London dealing today.

With no major US data on the docket today the focus will turn to UK where the BOE is holding monthly rate meeting and will issue its quarterly inflation report. In addition, PM May will also announce its White Paper on triggering Article 50 as UK moves ever closer to leaving the European Union.

The one-two punch of economic and political news could cause a whirlwind of volatility in cable today. While its difficult to gauge the reaction to the political news, on the economic front traders will focus on three things; an upgrade in GDP growth estimates, any mention of rising inflation, any hint that the current ultra-accommodative policy may need to be curtailed.

UK has surprised most analysts with much better than expected growth figures since the Brexit vote, but perhaps the best of “goldilocks” scenario where it enjoyed the access to the single market at much more competitive exchange rates, is now behind it. The latest UK data remains positive but has shown no improvement. If the BOE suggests that growth may have peaked, then cable could be in for nasty day of selling especially against the euro with EUR/GBP possibly testing 8500 once again in North American dealing.

Boris Schlossberg
Managing Director

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