The forex market spends a considerable amount of time deciphering G10 central banks' thoughts. It tries to anticipate policy makers' next move so individuals can adjust their portfolios accordingly. It's like a game of chess, and this week is not an exception. Central bankers took time out to give the rundown of their respective economies and answer public question on their policies. Usually this is "meat and potatoes" for the forex market, however, the new forex norm seems to be contained price ranges until there is a break in the interest rate cycle. Janet Yellen, the new Fed chair, sat through her first testimony before the House Financial Services Committee on Tuesday (today's meet is canceled due to weather). The market was looking for any "chinks in her armor" on the handover from one Fed head to the next - it was a non-event. The US economy will remain faithful to the Bernanke way – for the time being at least.
The pomp and noise came from the "Old Lady." The Bank of England under the stewardship of Governor Carney delivered its inflation report. This report includes the BoE's projection for inflation and economic growth over the next two-years. During the routine of his press conference, Carney said all the appropriate things, rhetoric that seems to be standard for the top developed nations – rates will remain low for longer, the UK labor market is far from complete. It's the UK job situation more than anything that has tripped up the Governor. Carney and company underestimated the underlying job strength of their economy. The UK unemployment rate is about to hit +7%, two years ahead of forecast and supposedly the trigger point under the BoE's forward guidance to start hiking interest rates. Despite the UK economy performing so well, no central banker can afford to raise rates any time soon – it's domestic economic suicide, as higher rates would quickly undo the tentative growth that these economies have succeeded so far in recapturing.
G10 monetary policy has stifled currency market volatility. The big picture price movements have more to do with varying interest rate policies while the intraday price gyrations are fundamentally and technically guided. With money cheap and rates on hold, G7 currency prices are shepherded along under the watchful eye of their respective central banks - at least until one happens to sever the interest rate cord. It's anticipated that the BoE's Carney will be the first to break the low rate cycle, but not for a while as inflation remains subdued and growth could be stronger. The prospect of future higher interest rates makes any currency look attractive. It will eventually come, but not anytime soon. The UK interest rate debate is all about when the BoE will hike, unlike the European Central Bank’s “looser monetary policy debate.” The ECB has returned to the systematic dovish talk, with members publicly commenting on negative deposit rates. The ECB is expected to ease monetary policy again, when and how is what the market is trying to guess. So we have a less dovish or perhaps more hawkish BoE, a dovish Yellen and a very dovish Draghi mix – all the required ingredients for a macro price move. Sterling has obviously been one of the outperformers this week – given its head by Carney's bullish economic sentiments. EUR/GBP has underperformed while GBP/USD has outperformed.
The specific EUR bounce this morning, is not unusual, but has many possible drivers. With the risk on and risk off mentality the varying price movements are more dominant – the single currency for the first half of this week underperformed due to rate differentials, however, the unwinding of EUR-antipodean positions (weaker Aussie employment numbers), and risk off is boosting the EUR's appeal this morning as the market heads stateside for US data. The market remains cautious and playing the percentages ahead of US retail sales. The EUR rally would suggest that investors are looking for a weaker headline sales print. Yellen this week reiterated that the Fed needs more evidence of economic weakness to change its current taper path. With this thought, and a stronger US headline sales print the whiplash positive US price move should be more intense.