The U.S. dollar was on the defensive after softer than expected economic data yesterday once again clouded the outlook for Fed monetary policy going forward. The slowest pace of services sector growth in four years last month and slower than expected private sector hiring dampened confidence in the U.S. recovery and raised some doubts about the outlook for further stimulus reductions by the Fed. While weather likely continued to play a factor in the notable economic slowdown of late, the Fed could still opt to pause in its winding down of monetary stimulus, a potentially negative scenario for the U.S. dollar.
Investors continue to keep one eye on geopolitical developments between Russia and Ukraine. A decree by Crimea’s regional parliament that it is now part of Russia and any Ukrainian troops on Crimean territory will be seen as occupiers, could quickly see tensions in the region flair back up after a nascent de-escalation yesterday.
The euro rose to session highs after the ECB left its key borrowing rate unchanged at 0.25% this morning. Many market participants had expected the ECB to cut lending rates following another dangerously low reading of CPI for the 18-member bloc. Markets await the post-meeting press conference, where ECB President Draghi could still lay out plans for non-conventional monetary easing by the central bank, a scenario that could undermine much of the euro’s recent resilience.
The Bank of England expectedly left its key lending rate unchanged and made no change its £375 billion pound bond purchase scheme. No statement was released by the BOE, but investors still see the Bank of England leading other major central banks in eventual monetary policy tightening, an outlook that should continue to lend support to the pound.
GBP: The Bank of England expectedly left its key lending rate and bond purchase program unchanged this morning and as is its tradition, made no statement following a meeting where no changes to policy were made. Still, the pound remains near multi-year highs against many of its major rivals. Investors expect that mounting signs of economic recovery in the U.K. will lead the Bank of England to begin raising lending rates early in 2015, well before other major central banks. That outlook should keep the pound well supported going forward, especially if upcoming readings of U.K. unemployment continue to improve.
AUD: The Aussie rallied to near a one-month high against the greenback after data overnight showed Australian retail sales jumped by 1.2%(m/m) in January, more than double the forecasted increase. The nation’s trade surplus also rose sharply, hitting its highest level in three years. The strong data suggest the nation’s economy has gotten off to a strong start in the beginning of Q1 and dampens any expectations of further monetary easing by the RBA. While further near-term strength for the AUD cannot be ruled out, any flare up in geopolitical concerns or another selloff in emerging markets could ultimately limit the Aussie’s upside.
JPY: The Japanese yen fell to a six-week low against the euro and near a two-week low against the U.S. dollar. Technical factors and comments from the nation’s largest public pension fund that it “need not cling to the safety of Japanese assets” sent the yen lower across the board. The yen’s downside should however remain limited by the potential for geopolitical concerns to resurface or by another major selloff in emerging markets.
USD: The dollar briefly jumped after data this morning showed that weekly jobless claims fell to 323,000 last week, the lowest level of initial claims since November 2013. The strong jobs figures while encouraging, will likely do little to support the dollar in the wake of this morning’s lack of monetary easing by the ECB.
EUR: The euro soared to its highest level since late January after the ECB left lending rates unchanged and made no signal that it intends to ease policy any time soon. While acknowledging the dangerously low level of inflation in the euro zone, President Draghi said that inflation expectations remain “well anchored” over the medium and long term. The fact that the ECB did not make any adjustments to monetary policy or signal that any change is likely in the near future was a bit of surprise to many investors and sent the euro soaring to highs of the session across the board.