Did this week’s major central bank events live up to their hypes? Here’s a rundown of what the Fed, BOE, and ECB said and how they affected currency price action.
Fed: Further reductions in “measured steps”
What was said: While FOMC members acknowledged the recent improvements in the labor market and the need to wind down stimulus, some cautioned that tapering might be misinterpreted as tightening. With that, they agreed to proceed carefully in “measured steps” in order to manage market expectations. Read more about it from yesterday’s piece.
Price reaction: USD/JPY immediately but briefly touched 105.00 while EUR/USD also dipped to 1.3550. The dollar hype didn’t last though, as traders realized that the Fed won’t be regularly decreasing its asset purchases. USD/JPY, EUR/USD, and other major pairs went back to their pre-FOMC minutes levels just hours after the report’s release.
What was said: The Bank of England didn’t need to release a statement since it kept its interest rates at a record low of 0.50% and maintained its asset purchasing program at 375 billon GBP. Market players had been expecting the central bank to adjust its unemployment rate threshold in reaction to the improvements in labor conditions.
Price reaction: GBP/USD shot up to the 1.6500 handle when it became clear that Carney and his gang won’t be jawboning the pound this month. Unfortunately for the bulls, the move was quickly erased as the decision was mostly priced in anyway. In the end it was still a good day for the pound as it ended the day in the green against its counterparts.
ECB: “Firmer” language on forward guidance
What was said: Like the BOE, the ECB decided to leave its monetary policies unchanged. Unlike Carney though, ECB Chief Mario Draghi caused ruckus when he hinted that the central bank is getting more worried over the euro zone’s inflation and money market conditions.
The biggest takeaway from Draghi’s speech is that aside from keeping their rates low “for an extended period of time,” the ECB is now threatening to act if the region’s inflation outlook worsened or if there’s unwarranted tightening in the money markets.
Price reaction: EUR/USD had been set to firmly trade above 1.3600 before the ECB’s statement but Draghi’s threats dragged the pair by 70 pips all the way to 1.3550. The bears eventually cooled off and the pair closed near its pre-ECB statement levels.
So it looks like the central bankers disappointed in the volatility department this week. Maybe the NFP report would give us more action?