FX news and analysis

USD

The dollar recovered strongly following the FOMC meeting on Wednesday at which the Fed kept monetary policy unchanged. The message on QE3 seemed to be that it would only be used in a recession. The Fed also highlighted the slowdown in employment and housing. Data on Wednesday was overall poor: Manufacturing ISM undershot its expected target of 50.2 coming out at only 49.8; July ADP Employment change showed an increase in hiring by 163k vs 120k expected – which although a strong figure was lower than the 172k upwardly-revised previous figure so had little impact. U.S Manufacturing in July expanded at its slowest pace for 19-months according to data from the Markit Economic think-tank, who’s index fell to 51.4 from 52.5 in June. Construction Spending came out as expected at 0.4% vs 1.6% previous, and ISM Prices Paid undershot expectations of 40 with a 39.5 print, although this was still an increase on the 37.0 previous.

EUR

The euro traded lower in most pairs on Wednesday after the results of the FOMC encouraged dollar buying after it became clear the Fed was unlikely to institute more QE except in extremis. The euro had been trading mixed and range-bound for most of the day as many traders stood aside in anticipation of all the central bank rate meetings today and tomorrow, however, after the FOMC it fell to 1.2217. The single currency was also pressured by more commentary from officials questioning a possible loosening of ECB monetary policy. This time it was from Jen Weiderman, the head of the Bundesbank, who questioned whether it was within the ECB’s remit to be able to buy peripheral debt in the markets and he warned it not to: “overstep its own mandate.” Expectations are mixed for outcome of tomorrow’s monthly ECB meeting. On the data front Euro-zone Manufacturing PMI fell slightly to 44.0 from 44.1 but not enough to impact the outlook.

GBP

The pound fell on Wednesday after U.K Manufacturing PMI showed a much larger than expected drop to 45.4 vs 48.4 previous and 48.4 (the same) expected. More weakness was caused by another sharp fall in house prices after Nationwide House Prices yoy in July fell by -2.6% vs -1.9% expected and -1.5% previous; month-on-month it also showed a deeper-than-expected retraction of -0.7% vs -0.2% expected. Later in the evening, after the FOMC, sterling weakened even more as the dollar rose after it became clear the Fed was further away from using QE3 than had previously been thought. Traders will now be awaiting the results of the BOE rate meeting tomorrow; whilst expectations had previously been that the U.K was quite a solid bet, recent data including 2nd quarter GDP and today’s PMIs have dampened the outlook and increased the possibility of further rate-cuts or more QE being announced.

JPY

The yen traded mixed on Wednesday, rising against the euro and the pound as riskier assets sold off and Japanese equity markets fell on slowdown fears, after the release of poor data from China and lower orders recorded by companies trading there. Chinese Manufacturing PMI in July fell to 50.1 vs 50.5 expected and 50.2 previous; HSBC Manufacturing PMI meanwhile rose compared to the previous month but remained below the 50 level which distinguishes growth from contraction. The lacklustre data weighed on risk appetite and the yen gained as a consequence. Against the dollar, however, it weakened after the FOMC this evening left monetary policy unchanged and reduced expectations of more easing. The yen may be poised to move again tomorrow as the BOE and ECB announce their policy measures, with a surprise increase in QE a possibility particularly (I think) from the BOE.

Written by Forex4you