20 November 2013
US Monetary Stimulus Strategy Under Pressure As Economic Recovery Continues To Be Challenged
The US economic recovery is once again the focus of the market with investors eagerly awaiting this week’s highlight event, the release of the minutes from the US Federal Reserve’s rate-setting committee, the FOMC. Janet Yellen, current vice-chair of the Fed and chairperson-elect, last week indicated that she will continue with the current monetary stimulus strategy until she sees a robust recovery, including a lowering of the nation’s 7.3 percent unemployment rate. She said the US economy must improve before the Fed will taper quantitative easing, adding that there are dangers both to end the stimulus too early or too late. The EUR/USD reacted to this news by climbing further towards 1.3470 at the beginning of Yellen’s speech.
Yellen’s comments were further justified by mixed employment and trade data; more Americans than forecast filed applications for unemployment benefits last week, with the jobless claims for the week ending November 9 falling to 339,000 from a revised 341,000 the week before. Meanwhile the trade deficit in the US widened more than forecast in September to a four-month high, and exports declined for a third month. The gap in goods and services trade increased 8 percent to $41.8 billion from a revised $38.7 billion in August. Wednesday’s FOMC minutes are expected to affect the performance of the USD, with forecasts indicating that positive economic and financial positions are likely to have a bullish impact on USD pairs; the EUR/USD will probably test new lows for the month of around 1.3295.
After the shock cut in Eurozone interest rates, the Council stressed that the move was in line with the central bank’s forward guidance on rates, introduced in July 2013, “given the latest indications of further diminishing underlying price pressures in the euro area over the media term, starting from currently low annual inflation rates of below 1%”.
The Eurozone inflation rate fell to 0.7% in October, mainly in line with expectations but the lowest rate since November 2009. German inflation was also announced to have fallen by 0.2% in October, after remaining flat the previous month. Although this data seems disappointing, it was in line with analysts’ forecasts and, on an annual basis, German CPI grew 1.2% in October, down from the 1.4% rise in September. The EUR/USD slid to a low of 1.3430 but found support at the 100-hour SMA and bounced slightly. Friday’s German GDP announcement is anticipated at 0.3% and, in the rare case that this comes out not as expected, this will have a huge impact on EUR pairs.
The first Bank of England inflation report since new Governor Mark Carney took over the position has indicated robust growth in the UK economy. This has spurred the UK’s central bank policy makers to bring forward the forecast date for unemployment to reach the target 7% level, which is when they expect an interest rate increase will become a real possibility. The authors of the inflation report also cut the near-term predication for consumer-price increases and expect them to slow to just below the target 2% by the first quarter of 2015.
UK unemployment data was positive showing a drop by 41.7K of those claiming unemployment during September, bettering the estimated drop of 35K albeit a tad higher than August’s drop of 44.7K (revised). This week investors will be closely watching for Wednesday’s minutes from the last Monetary Policy Committee meeting which will reveal how the members voted and give indications for future monetary policy in the UK.
Last week saw positive news out of Japan, with the economy posting a current account surplus of 587.3 billion yen in September. The headline figure topped expectations for a surplus of 400.8 billion yen following the 161.5 billion yen surplus in August. The surplus jumped 14.3 percent on year, also beating forecasts for a contraction of 10.4 percent following the 63.7 percent annual plummet a month earlier. Additionally, Japan’s economy is expected to have risen 0.4% on quarter, or an annualized +1.7%, posting a fourth straight quarterly growth in July-September, but its pace has decelerated from a sharp 0.9% expansion (an annualized +3.8%) in Q2 due to a slump in exports to the U.S. and China and slower consumer spending, economists forecast. Investors are now awaiting the Bank of Japan’s interest rate decision on Thursday, with rates anticipated to remain at 0.10%.
What to Watch this Week:
USD pairs are the ones to watch on Wednesday when the FOMC minutes are released. If the minutes indicate the US economy is in a positive financial and economic condition, the USD will likely gain power against his rivals as the likelihood of tapering becomes closer. If the news about the economic recovery is negative, the USD will be pegged on lows against its major rivals of EUR, JPY, AUD, and GBP.
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