Minutes from the February meeting of the FOMC threw the market for a loop Wednesday afternoon. The message, which was at first taken to be mildly dovish and contrary to expectation, turned out to hide a kernel of hawkishness that induced a bit of volatility in dollar denominated pairs.
In a nutshell; the FOMC sees economic expansion continuing to accelerate at a gradual pace consistent with the current inflation outlook and rate hiking time-line. Why the market took it to be dovish I don’t know; the committee affirmed its commitment to pursue rate hikes at the already projected “gradual” rate, and its estimation the economy will reach 2% inflation in the medium term.
The FOMC still sees wage growth as slow but there are signs this is changing. The last NFP report had wage inflation running near 3% and well above target. The initial move sparked by the report was to send the dollar crashing but once the true meaning of the message was understood, that rate hikes are coming, it quickly reversed to set new highs for the day.
The EUR/USD shot up on the news, but the gains lasted less than half an hour. The pair hit resistance at 1.236 and fell back so hard and fast it blew right through the earlier lows to set a new low on the day. The move took prices below the short term moving average in an apparent break of support but that was quashed early on Thursday with the release of the ECB minutes. The governing council let it be known that they see the EU economy expanding at “robust” pace, that this pace will lead to inflation hitting target and the expected trajectory of interest rates was up.
The caveat is that low rates are still warranted, and patience is due. The market took this to mean tightening is on the way and firmed the euro. The EUR/USD is now trading near the middle of its near-term range, sitting on support with listless indicators. I expect to see sideways range bound trading until late next week when more, significant data is due.
UK GDP came in weaker than expected, slackening expectation of a BOE rate hike. The 0.4% QoQ and 1.4% YoY increases are positive but weaker than the previous read and market estimates. Mitigating this is a better than expected read of the Services Index but not enough to truly move the pound. It fell versus the euro, but losses were minimal. The pair moved up to retest the moving average, near the middle of a near term trading range, and looks like it will touch the top of the trading range. The indicators are mixed, consistent with range bound trading. Resistance is likely at 0.08900, support is just below the moving average near 0.8800.
The euro was able gain appreciably versus the Canadian dollar as data in that region is much worse than expected. Canadian retail sales fell -0.8%, -1.8% at the core, as spending slows. The news sparked a continuation of an ongoing rally that extended prices by another half percent.
The pair is now trading at a two year high with eyes on moving up to long term resistance at 1.6000.
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