The major currency pairs mostly consolidated in recent ranges during the European session but are vulnerable to the upcoming Fed events – FOMC policy announcement and Fed Chair Yellen’s press conference.
Sterling was the worst performer as it fell to a near 5-year low of 1.4634 following the dovish Bank of England minutes released today which showed concern on the risks of a strong pound with respect to inflation. This concern centered on the policy divergence between the BoE and the ECB and how the strength of the UK economy could push the pound higher and increase the chance that low inflation will persist.
The pressure on the pound was compounded by the simultaneous release of disappointing UK employment data – soft wages and a flat unemployment rate. The upside was that the number of Britons with jobs increased by 143,000 to 30.939 million in the three months through January. This brought up the employment rate to 73.3% which was an all-time high. However the good news was overshadowed by average earnings, at a 1.8% rate, significantly lower than 2.2% growth expected. (This was a 3-month average to January.)
The euro rose modestly throughout the European session to a high of 1.0634 but is vulnerable to the upcoming Fed events. Eurozone data releases were mixed today, with a disappointing trade balance offset by improvement in construction output. These were not tier one data and had little impact on the euro.
The dollar softened against the yen in Europe to fall back to the lower end of its recent range of 121.00 – 121.50. Investors are positioning themselves ahead of the Fed events. It is widely expected that the word patient” will be removed from the FOMC statement. This word has characterized the Fed’s forward guidance since last December. If the Fed does not drop the word, then expectations of a June rate hike will fall considerably, and will likely be pushed to September. The dollar would likely weaken. In the event the Fed drops the word patient but softens its inflation expectations, this would also be a dovish development and weigh on the greenback.