The minutes of the latest FOMC meeting caused quite a ruckus in the currency market as policymakers showed signs of hawkishness for the U.S. economy. In fact, some policymakers even suggested that they might overlook the previously mentioned inflation and employment targets, as they considered withdrawing asset purchases sooner. The U.S. unemployment rate still stands at 7.9% and is miles away from the specified 6.5% target yet Fed officials remarked that they might at least slowly reduce or taper off their quantitative easing moves as the economy shows signs of a rebound. Additionally, some policymakers warned against the dangers of easing too much, especially since the U.S. government is nearing its spending cuts deadline. While President Obama keeps reassuring markets that the U.S. economy won't crash during the first of March, which is the sequestration deadline, this still poses a threat to the ongoing recovery. Nevertheless, interest rate expectations continue to drive markets and the recent turnaround in the FOMC's rhetoric could provide support for the dollar in the near term.
The euro lost a lot of ground to the U.S. dollar during yesterday's trading as the change in the FOMC's rhetoric sparked strong demand for the latter. EUR/USD is still hovering around the 1.3250 to 1.3300 support zone and trend line though, which suggests that traders are on the fence when it comes to this pair. Last week, the region printed weak GDP reports and slumped deeper into recession but recent economic surveys seem to be hinting at a good rebound. German and euro zone ZEW both came in stronger than expected for February and the upbeat sentiment could trickle to strong business spending and hiring. Euro zone PMIs are on tap today and this could set the tone for euro trading for the rest of the week.
Perhaps the most divergent of interest rate expectations are those from the BOE and the Fed. While the former has expressed its willingness to implement further stimulus, the latter just hinted that a withdrawal of easing measures could be imminent. This explains why GBP/USD just broke below the major support area around 1.5300 to 1.5350. Not even the stronger than expected claimant count change was able to provide support for this pair as the MPC meeting minutes showed that the number of dovish members increased. The 10-year bond auction and CBI industrial order expectations are on tap today and weak outcomes could push GBP/USD even lower.
Switzerland just released stronger than expected trade balance, which showed that the surplus widened from 0.90 billion CHF to 2.13 billion CHF for January. This was spurred by an increase in exports while imports dipped by 0.5%, according to their Federal Customs Office. However, the franc could continue to sell off against the dollar and the euro, which are both enjoying improved interest rate expectations.
USD/JPY has been trading sideways for a while as markets await Abe's appointment of the next BOJ head. The 94.00 handle has held as strong resistance since the pair made several failed attempts to break beyond that level. The consolidation has been getting tighter, suggesting a potential breakout either back to 92.00 support or until the 95.00 resistance.
Commodity Currencies (AUD, CAD, and NZD): Bearish
Shaky fundamentals of the commodity currencies' economies have been weighing on these higher-yielding ones so far. Traders are cautious of buying the Kiwi, which was said to be overvalued, according to RBNZ head Graeme Wheeler. Traders are also uneasy about buying the Aussie, as the RBA could implement a rate cut in their next policy decision during the first week of March. Meanwhile, the Loonie has been selling off as BOC head Carney, who has been one of the most hawkish central bank officials, is set to exit soon.
by Kate Curtis of Trader's Way