Noticias
21 Aug 2015

Dollar stutters due to lack of clarity from Fed

EUR/USD moving up into $1.12 territory, with the pair opening this morning up at $1.128. Likewise, EUR/GBP has sustained its recent upward trend, is changing hands near 71.8p as trading gets underway today. Elsewhere, the GBP/USD was generally in a $1.561-1.572 range over the last 24 hours with the softer dollar tone seeing it trading to the upside of this range.

 

Dollar

 

The dollar has not been helped by the lack of a clear direction from Fed as to the start date for rate hikes. The dollar has also suffered from speculation that the increased market turbulence in China could delay the timeframe for US rate hikes. China at present is the biggest worry even while the US economy is operating at 5.3% unemployment which is the lowest since April 2008. 

 

Today if news reports mention the interest rate hike, the next paragraph mentions inflation. Just this week, Dennis Lockhart (Atlanta Fed president) stated "Seeing inflation converge ... will clearly be an important signpost for us as we are looking at decisions to be made post-liftoff".

 

Inflation will be the key topic at the Fed's annual Jackson Hole economic conference on Aug. 27-29 and the gathering is likely to highlight how little policymakers and economists feel they understand about the behavior of something so central to monetary policy.

 

Inflation did not fall as much as expected during the 2007-2009 recession, it has not risen as much as expected during the recovery, and there is suspicion it may remain hard to budge, said Michael Owyang, an assistant vice president at the St. Louis Federal Reserve Bank.

 

Inflation in the past two decades has baffled economist as the old theory that employment and wages no longer have a large factor to play. The Phillips curve popularised the link between unemployment and short term interest rate in the 70’s and 80’s however once the tech boom began in the late 90’s and Alan Greenspan initiated historically low interest rates. Inflation has become increasingly hard to understand. Two factors that is believed to have a greater push on inflation is consumer and business expectations.

 

Euro

 

The Eurozone PMI’s for August has remained unchanged this month at 52.4. After last week’s slightly disappointing Q2 GDP data, the PMI surveys will be looked to for an indication of Q3 performance. Currency-wise, the main driver of the euro may continue to be risk sentiment. If markets remain nervous, we would expect to see the euro hold onto its firmer tone heading into the weekend.

 

 

 

Also last night Alexis Tsipras resigned from government, seeking the president to call an election for as early as possible. This is a move to stenghten his position with Syriza as more people have decided to oppose the party leader.  

 

"I will go the president of the republic shortly to submit my resignation, as well as the resignation of my government," Tsipras said in a televised address before he met Pavlopoulos.

 

Unfortunately, Tsipras resigns on the same day the government began receiving the 86 billion euro bailout package. It is very conceivable that the first round of reforms that require implementation will occur after the election. 

 

Especially as Bloomberg stated this morning that a small group of Syriza members had formed their own party with a manifesto which wants to completely renege on the bailout agreement. One thing that is certain is that the Greek political landscape is going to shift once again over the next for to six weeks. However, throughout the past six weeks the markets have become increasingly immune to Greek developments and instead are fluctuating to China and the Federal Reserve

 

 

The Euro this morning trades at $1.12512 and £0.71734

 

 

Pound Sterling

 

 

 

 

The graph above shows the Pound in relation to the Euro (Blue line) and the US Dollar (Orange line). Both demonstrate the Pound has maintained range of activity between $1.58 and $1.53. For instance the Pound/Dollar was at its lowest before the UK election, similarly the Euro was at its lowest in the proceeding weeks because of Greece. 

 

The recent strengthening of the Euro against the Pound is a result of the Yuan devaluation in relation to the dollar and some mixed information in the past week from the US. On the future market, traders see the probability of rate rise at 32% from 48% a month earlier. 

 

As a result this could be good news for the Bank of England as they foresee an interest rate rise in late 2015, early 2016. Excluding inflation, the UK economy continue strong employment, strong business sentiment which will keep the currency strong against the dollar. At present we are in the process of crossing the chasm as the Fed now has to decide whether to delay or proceed as has been talked about for several months. The longer the Fed delays, the longer this period of the Dollar losing further ground against the Pound will persist. 

 

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