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Dollar weakens after investors read doveish bias into FOMC statement and Q&A

USD

The dollar traded lower in early trading, and then accelerated to the downside after investors interpreted the FOMC statement and Janet Yellen’s post-meeting Q&A, as signalling a step back from the previously more hawkish stance.

Despite the statement acknowledging strengths in the labour market and rephrasing several stock sentences about the economy in a more favourable light, traders sold the dollar as there was no change in the language of forward guidance to lead them to expect tightening on the horizon.

Yellen refused to be pinned down to saying rates would go up this year, saying it depended on how well the economy performed. In a key phrase she stated that “An increase is certainly possible this year.” However, this was a step back from her less ambiguous March comments that a rate rise would be “warranted” later this year.

The labour market was still too weak as number of part-timers was still too high and labour participation too low. Yellen wouldn’t re-introduce a numerical value for unemployment rate to signal a hike. Whilst the Fed had witnessed “tentative” signs of wage growth they were not definitive yet.

Another concern, Consumer Spending, had bounced back from its winter slump.

As for inflation: downward pressures had eased, but the Fed was is still concerned that inflation continued to undershoot the Fed’s 2% target.

Finally she said the FOMC would decide on a rate hike on a meeting-by-meeting basis, although at the July meeting there is no press conference so it would be an unlikely candidate for lift-off.

EUR

The euro traded mixed in most pairs on Wednesday after comments from the head of the Greek Central Bank Yannis Stournaras increased the ‘fear-factor’ surrounding the financial crisis in the country, after he said that a failure to reach an agreement with international creditors could lead Greece from a “manageable” debt crisis into an “un-manageable” one. Which would “mark the beginning of a painful course,” which would irretrievably lead to an exit from the euro-zone and ultimately the E.U.

The next meeting to solve the crisis is scheduled on Thursday June 18 when the Euro-group of Euro-zone Finance ministers will be meeting, however, Yannis Varoufakis, Greece’s Finmin has already made it clear he will not be bringing any new proposals to the table. Given both sides have now rejected all the other side’s proposals so far this leaves little hope for a breakthrough emerging then.

It is said that the creditor institutions are pressuring Greece to make 2bn more in budget savings which the Greek government has so far refused to countenance.

On the data front, the single currency was supported by CPI data (final estimate) for May, which came out in line with expectations, of 0.3% yoy, 0.2% mom and 0.9% yoy for Core.

GBP

The pound strengthened on Wednesday after data showed a promising rise in earnings which increased speculation the BOE might move to tighten policy sooner than previously thought.

Weekly Earnings Ex Bonus in April (3month/year-on-year) rose to 2.7% from 2.3% in the previous year, beating expectations of a rise to 2.5%. BOE policy-makers have often singled out the problem of a lack of wage growth as one of the most significant impediments to raising rates, however, the upbeat figures on Wednesday went a way to removing it.

Other data was as expected or slightly below, with the Unemployment rate coming out at 5.5% as forecast; Employment Change showing 114k more jobs were added to the economy in April, when analyst’s estimates had been for 190k. Jobless Claims fell by -6.5%, which was below the -13.8k expected. The Claimant Count rose 2.3%, higher than the 2.2% forecast.

The other main economic news event was the publication of the BOE minutes, which showed that once again the decision to keep rates at 0.5% had been unanimous, but that two officials had viewed the issue as “finely balanced.”

JPY

Japan’s trade deficit expanded in May while imports plunged and exports grew at the slowest pace in nine months.

Exports rose 2.4% from the previous year to 5.741 trillion yen in May, as overseas shipments to the US and China moderated, in a sign that a tepid beginning to the year of the world’s number one economy and weakening growth in China may hinder Japan’s economic recovery.

Export volumes considered to be more a trustworthy measure of Japan’s export strength than the overall value dropped 3.8%, the first decline in 3 months according to the Finance Ministry.

At the same time imports plunged 8.7% to 5,956 trillion yen in the reported month recording the fifth straight month of decrease. The median economists forecast stood at 7.5% decline. The drop being mainly attributed to mineral fuels which plummeted 33%.

As a result Japan logged a trade deficit of 216.0 billion yen in May compared with 53.4 billion yen in April.

The yen was trading at 123.85 per dollar late in the New York session.

USD

The dollar traded lower in early trading, and then accelerated to the downside after investors interpreted the FOMC statement and Janet Yellen’s post-meeting Q&A, as signalling a step back from the previously more hawkish stance.

Despite the statement acknowledging strengths in the labour market and rephrasing several stock sentences about the economy in a more favourable light, traders sold the dollar as there was no change in the language of forward guidance to lead them to expect tightening on the horizon.

Yellen refused to be pinned down to saying rates would go up this year, saying it depended on how well the economy performed. In a key phrase she stated that “An increase is certainly possible this year.” However, this was a step back from her less ambiguous March comments that a rate rise would be “warranted” later this year.

The labour market was still too weak as number of part-timers was still too high and labour participation too low. Yellen wouldn’t re-introduce a numerical value for unemployment rate to signal a hike. Whilst the Fed had witnessed “tentative” signs of wage growth they were not definitive yet.

Another concern, Consumer Spending, had bounced back from its winter slump.

As for inflation: downward pressures had eased, but the Fed was is still concerned that inflation continued to undershoot the Fed’s 2% target.

Finally she said the FOMC would decide on a rate hike on a meeting-by-meeting basis, although at the July meeting there is no press conference so it would be an unlikely candidate for lift-off.

EUR

The euro traded mixed in most pairs on Wednesday after comments from the head of the Greek Central Bank Yannis Stournaras increased the ‘fear-factor’ surrounding the financial crisis in the country, after he said that a failure to reach an agreement with international creditors could lead Greece from a “manageable” debt crisis into an “un-manageable” one. Which would “mark the beginning of a painful course,” which would irretrievably lead to an exit from the euro-zone and ultimately the E.U.

The next meeting to solve the crisis is scheduled on Thursday June 18 when the Euro-group of Euro-zone Finance ministers will be meeting, however, Yannis Varoufakis, Greece’s Finmin has already made it clear he will not be bringing any new proposals to the table. Given both sides have now rejected all the other side’s proposals so far this leaves little hope for a breakthrough emerging then.

It is said that the creditor institutions are pressuring Greece to make 2bn more in budget savings which the Greek government has so far refused to countenance.

On the data front, the single currency was supported by CPI data (final estimate) for May, which came out in line with expectations, of 0.3% yoy, 0.2% mom and 0.9% yoy for Core.

GBP

The pound strengthened on Wednesday after data showed a promising rise in earnings which increased speculation the BOE might move to tighten policy sooner than previously thought.

Weekly Earnings Ex Bonus in April (3month/year-on-year) rose to 2.7% from 2.3% in the previous year, beating expectations of a rise to 2.5%. BOE policy-makers have often singled out the problem of a lack of wage growth as one of the most significant impediments to raising rates, however, the upbeat figures on Wednesday went a way to removing it.

Other data was as expected or slightly below, with the Unemployment rate coming out at 5.5% as forecast; Employment Change showing 114k more jobs were added to the economy in April, when analyst’s estimates had been for 190k. Jobless Claims fell by -6.5%, which was below the -13.8k expected. The Claimant Count rose 2.3%, higher than the 2.2% forecast.

The other main economic news event was the publication of the BOE minutes, which showed that once again the decision to keep rates at 0.5% had been unanimous, but that two officials had viewed the issue as “finely balanced.”

JPY

Japan’s trade deficit expanded in May while imports plunged and exports grew at the slowest pace in nine months.

Exports rose 2.4% from the previous year to 5.741 trillion yen in May, as overseas shipments to the US and China moderated, in a sign that a tepid beginning to the year of the world’s number one economy and weakening growth in China may hinder Japan’s economic recovery.

Export volumes considered to be more a trustworthy measure of Japan’s export strength than the overall value dropped 3.8%, the first decline in 3 months according to the Finance Ministry.

At the same time imports plunged 8.7% to 5,956 trillion yen in the reported month recording the fifth straight month of decrease. The median economists forecast stood at 7.5% decline. The drop being mainly attributed to mineral fuels which plummeted 33%.

As a result Japan logged a trade deficit of 216.0 billion yen in May compared with 53.4 billion yen in April.

The yen was trading at 123.85 per dollar late in the New York session.



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