The dollar has now completed a full reversal of the gains seen mid-March to early April, with the market’s interpretation of messages from the US Federal Reserve accounting for most of the climb higher and subsequent reversal. Recall that it was Yellen’s comments in the wake of the March meeting that caused the initial move higher, as she pointedly suggested rate hikes could come 6 months after the end of tapering.
Perhaps not surprisingly, last night’s minutes were not as clear, which saw the dollar weaken, back to levels that were prevailing just ahead of the March meeting. The minutes stated that the rate forecasts published “could be misconstrued as indicating a move… to a less accommodative reaction function”. Interest rate futures jumped 10bp on the back of the minutes (reflecting lower rate expectations), with pricing for rates at the end of 2015 moving back to pre-Fed meeting levels. All in all, this episode has shown just how much influence one comment can have on markets.
The Aussie again catches the attention overnight, up above 0.9400 once again on the latest labour market data, which showed headline employment rising 18k and the rate falling to 5.8% (previous was 6.1%). So once again we are at new highs for the year and there is now the possibility that the RBA could be hiking rates before the year is out. For today, there will be one eye on sterling given the Bank of England rate decision, but the chances of anything significant are pretty low to say the least. Sterling has held onto the gains seen in the wake of the production numbers earlier in the week, cable just below 1.68 at the European open.
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