If FX markets moved in a similar way to games of football then we would have a much more interesting market than we currently inhabit. Unfortunately it looks like we will have to wait on tonight’s semi-final for more fireworks with traders happy to tread the status quo once again.
Despite some poor data in the past 24hrs we have not seen breaks of recent ranges. It has been clear for a while that the ongoing injections of liquidity and soothing words from central banks are the real movers of price action with little that data can do. EUR/USD, for all the movement that a dovish ECB meeting and a moon-shot payrolls announcement could create, is only now 30 pips lower. Thankfully today is all about central bank speak.
Three ECB speakers (Coeure, Praet and Draghi) are due today while we also receive the latest Federal Reserve minutes. The minutes are from the meeting before the latest PCE inflation and payrolls announcements and this therefore allows us to view policymakers’ thoughts through the prism of this new data. The unemployment rate has fallen to 6.1% in the United States. It was 7.5% 12 months ago. The latest projections only have this level being reached by the end of the year. There is definitely the prospect for USD strength if members of the FOMC talk about a tightening of labour conditions driving inflation higher.
That being said, we did see the Fed’s overall path of interest rate expectations shift higher from March, with the median prediction seeing rates at 2.5% by the end of 2016. The longer-run equilibrium rate came lower to 3.75% from 4%, however, perhaps reflecting the popular thinking that rates are unlikely to reach the levels seen pre-crisis as Fed Member Kocherlakota spoke of last night.
Hopefully we also get to see what the Fed Committee thinks of low volatility in asset markets. Overall volatility has been driven lower by global central bank asset purchases programs and the subsequent search for yield. We do expect that volatility will pick up eventually – thankfully – but apart from a exogenous market shock, it will be a normalisation of interest rates and monetary policy that will do it.
We know that there was some discussion around the Fed’s plans for an exit strategy from investments made as part of their quantitative easing program. We don’t expect this to begin until 2016, once interest rates have been taken higher. The minutes are due this evening at 7pm BST.
GBP remains happily ensconced in its recent ranges despite some very poor industrial data yesterday. Yesterday’s 1.6% decline was the biggest fall in UK factory output for 16 months and has to call into question just how strong and resilient the balancing act of UK growth really is. PMI survey data has continued to show strong growth in orders, employment and sentiment in recent months so to see such a decline is indeed puzzling. Trade should begin to benefit from an improving growth picture globally although the strong level of the pound may be starting to impinge on export orders.
All in all, this was a confusing release and hints that the UK recovery may not be quite as strong as data has shown in the previous few months. Sterling slipped, while curves that show investor expectations of the Bank of England base rate showed a softening of those bets. The National Institute of Economic and Social Research’s latest growth expectation is still counting on a strong industrial number however. The NIESR believes that we will have seen growth of around 0.9% in Q2 mainly driven by a continued, strong expansion in consumer spending.
