The US Federal Open Market Committee (FOMC) monetary policy statement and press conference last evening (GMT) was characterised by a continuation of seriously mixed messages to the Forex and other markets. On the one hand the committee has removed the terminology from the statement that included the word “patient”, which it had at least allowed market participants to believe would signal a start in core interest rate rises after another two meetings, but replaced it with so many caveats that the whole exercise is now seen as pushing rate increases further into the future than they had already been. The statement is thus seen as dovish, despite the removal of the P word.
Three things are worrying Ms. Yellen and her colleagues: (1) a perception of slowing economic growth (2) a stubborn resistance on the part of wage rises to keep pace with the improving employment rate and (3) low inflation. All of these things are interlinked, and the common denominator between them is the value of the US dollar. A rising dollar hurts exports, which depresses wages and economic growth. Low inflation, as is being demonstrated in the Eurozone at present, can be combated by encouraging a lower currency exchange rate. It all adds up to pushing core interest rate rises further and further out into the future, because the first actual rate rise can be calculated to give a boost to the US dollar that could put recent strength in the shade.
US dollar suffers
Last evening, the Forex market got the message, and sold the Greenback. When one adds to this the fact that, technically, the dollar has been seriously overbought in recent times, particularly against the Euro, one can be forgiven for expecting more of the same in the coming days.
In this regard much will also depend on the behaviour of the Single Currency itself. QE in the Eurozone is a powerful determinant of Euro strength or weakness, and it has only begun to be implemented. One way or the other, we can expect some volatility in Foreign Exchange.