US Dollar Suffers as US Fed Eases Back on First Rate Hike Timing
- Written by: Will Peters
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Above: Comments by St. Louis Fed President James Bullard helps stem some of the recent USD strength.
Is the US Federal Reserve taking is foot off the pedal in its race to raise interest rates?
According to recent forex market action the answer could well be a yes.
Traders have sold the US dollar against the British pound, euro and a host of other currencies in recent sessions as they come to the realisation that they have have been overly generous in their pricing to the first US interest rate rise.
"The U.S. dollar was on the back foot overnight as relative calm came over global financial markets and investors digested yesterday’s surprisingly dovish comments from a Federal Reserve policymaker," says Omer Esiner at Commonwealth Foreign Exchange.
A rollercoaster week for global stocks and bonds had intitially driven investors to the relative safety of the dollar, especially against its higher yielding and riskier rivals.
Above: The pound to dollar exchange rate (GBP/USD) has recovered this week. The conversion rate has consolidated ground above the key 1.600 level.
Note: the above levels are representative of the inter-bank markets. Your bank will subtract a spread at their own discretion. However, an independent FX provider will guarantee to undercut your bank's offer, thereby delivering up to 5% more FX. Learn more.
Why has the British Pound Dollar Exchange Rate Recovered?
The pound sterling (GBP) roared back into contention on the back of some poor economic data releases from the US economy.
The USD's upside was dampened by a precipitous drop in Treasury bond yields.
Esiner says:
"A very weak global economic backdrop and mounting fears of deflation prompted market participants to push out their timelines for eventual Fed rate hikes.
"Yesterday, St. Louis Fed President James Bullard said that the Fed could put off its plans to end its quantitative easing program, which had been scheduled to wind down this month.
"Expectations for the Fed to wind down QE and begin raising rates mid-2015 had been a pillar of the dollar’s historic rally over recent weeks. Consequently, any change in the timeline for eventual Fed policy normalization will continue to weigh on the dollar."
Euro to Dollar: Long-Term Negative Bias in Place
The euro has shown resillience over recent days despite the emerging jitters concerning the outlook for the Eurozone economy.
Nevertheless, the long-term picture remains poor.
According to Piet Lammens at KBC Markets there are however chances that the longer-term downtrend could be invalidated:
"The technical picture of EUR/USD deteriorated after the break below the key 1.2662 support level (Nov 2012 low).
"We have a LT negative bias on EUR/USD. The trend is intact, but the price action since the middle of last week suggests that the market was too long USD. It might take time for the pair to work through oversold conditions. The 1.2043/1.1877 support is the next LT target.
"The return above 1.2791 is an additional sign of short-term USD weakness.
"A re-break above 1.2995 would be really significant and suggest a real loss of momentum in the longstanding EUR/USD downtrend. This is not our preferred scenario, but in this high-volatile environment, caution is warranted."
