The Greenback tossed and turned for the most part of the trading session, getting support from upbeat PMI readings then dipping around the release of the FOMC minutes before recovering again.
It was a different story for the pound, as it initially rallied during the first part of the BOE Inflation Report hearings then resumed its drop later on.
- U.S. flash manufacturing PMI up from 55.5 to 55.9 vs. 55.4 forecast
- U.S. flash services PMI up from 53.3 to 55.9 vs. 53.8 forecast
- U.S. existing home sales down from 5.56M to 5.38M vs. 5.61M estimate
- BOE Governor Carney not committed to a certain path of interest rates
- Carney: U.K. at peak point of GBP pass-through effect on inflation
- Carney: Currency depreciation is not a good economic strategy
- BOE member Haldane: U.K. saw stronger than expected momentum last year, more hawkish view warranted
- BOE member Broadbent: Inflationary pressures firming, degree of spare capacity has shrunk
Upbeat U.S. flash PMI data
The Greenback was off to a good start thanks to stronger than expected flash PMI readings for the month.
Markit’s flash manufacturing PMI jumped from 55.5 to 55.9 to reflect stronger industry expansion. Components of the report revealed that a sharp and accelerated increase in incoming new business boosted the headline figure.
The flash services PMI also climbed from 53.3 to 55.9 versus the estimate at 53.8. Underlying data showed that a continued rebound in new order volumes spurred the reading to its highest level since early 2015.
In contrast, U.S. existing home sales turned out to be a disappointment as the reading fell from 5.56 million to 5.38 million instead of improving to the projected 5.61 million figure.
BOE Inflation Report hearings
The spotlight turned to pound pairs a few hours into the New York session as BOE officials Carney, Haldane, and Broadbent testified on their inflation and economic outlook before Parliament’s Treasury Committee.
To start, BOE Governor Carney made some clarifications about changing market expectations relative to their earlier rate hike in November last year. He cited that they are now almost on track towards three hikes compared to two back then due to evolving inflationary pressures.
However, Carney also mentioned that the U.K. is at the peak point of seeing the pass-through effect of a weak pound on price levels. With that, policymakers expect to bring annual inflation back to target in less than three years.
As for MPC member Haldane, there are reasons to be more hawkish on the global economy and also on the home front since the U.K. has seen stronger than expected momentum last year. Haldane warned about the dangers of hiking too late, citing:
“Historically the thing that has really killed jobs has been central banks stepping on the brakes too late. We are absolutely clear we don’t want to be back there again because it’s bad news for jobs.”
MPC member Broadbent added that they are seeing stronger than expected inflationary pressures as the degree of spare capacity has shrunk.
When it came to the issue of Brexit, Carney acknowledged that market participants probably didn’t price in tightening expectations in the middle of these uncertainties. Still, he explained that the resulting financial market volatility was “small potatoes” and that monetary policy can be nimble to adjust.
FOMC minutes released
Hawks seemed to have the upper hand during the latest FOMC monetary policy huddle as majority of the members agreed that stronger growth supports the likelihood of more rate hikes.
In particular, a good number of committee members voted to upgrade growth forecasts because of strong momentum and the potential impact of tax reform. When it comes to inflation, the FOMC minutes noted:
Inflation on a 12‑month basis is expected to move up this year and to stabilize around the Committee’s 2 percent objective over the medium term.
Of course some FOMC members also warned that financial market risks could also come into play as the economy approaches its full potential. Still, policymakers judged that near-term risks remain roughly balanced but some saw those as tilted to the upside.
Stock indices closed in the red on slightly stronger tightening expectations while bond yields continued to advance:
- Dow 30 index is down 166.97 points to 24,797.78 (-0.67%)
- S&P 500 index is down 14.93 points to 2,701.33 (-0.55%)
- Nasdaq is down 16.08 points to 7,218.23 (-0.22%)
Major Market Mover(s):
The pound initially drew support on a more upbeat assessment shared by BOE officials but eventually resumed its slump as bulls weren’t too impressed.
GBP/USD rallied to a high of 1.3991 then fell back to 1.3934 before the FOMC minutes, GBP/JPY turned upon reaching a high of 150.48 then fell back to 149.85, and EUR/GBP popped up to a high of .8857 then retreated to .8813.
The dollar raked in some gains after the release of the upbeat PMI reports, sold off around the release of the FOMC minutes, then quickly resumed its climb as bond yields ticked higher.
EUR/USD spiked to a high of 1.2361 then fell back to a low of 1.2280, USD/JPY dropped to a low of 107.29 then rallied back to a high of 107.90, and USD/CHF dipped to .9343 then scurried back to the .9400 mark.
The yen also chalked up some decent two-way moves as it reacted mostly to dollar movements.
NZD/JPY climbed to a high of 79.30 then retreated to 78.74, AUD/JPY popped up to 84.63 then fell back to the 84.00 handle, EUR/JPY hit a high of 132.78 then slumped back to 132.13, and CAD/JPY rallied to the 85.00 levels then fell to 84.74.
Watch Out For:
- 2:00 am GMT: New Zealand credit card spending (6.3% previous)
- 5:15 am GMT: Testimony by FOMC member Quarles