This week saw Janet Yellen deliver her final FOMC speech before standing down. She must be credited for her work and lengths she has gone to stabilise the US economy, reform financial services and perhaps saved the global economy from the brink of the worst financial crisis of all time. EUR/USD naturally reacted to the meeting and the FED’s sentiment.
The federal reserve bank delivered an upbeat speech this month. Whilst many facets of economic data have supported the Fed’s strategy US inflation has remained somewhat of a work in progress. This month however saw Janet Yellen take a much more optimistic outlook on inflation. During her speech Yellen stated that thought that US inflation would increase and stabilise closer to the ideal of 2%.
Strong US economic data
In her last FOMC meeting, Yellen gave testament to the strong US data which has allowed the US to prosper saying that the Jobs market, business investment and household spending had all been strong. Unemployment also remains at historic lows with the latest non-farms and unemployment rate being released in a few days.
Next US interest rate rise
Markets have anticipated and almost certainly priced in a US interest rate rise of 0.25% in March. The March meeting will be chaired by the new fed chair Jerome Powell. There has been a slight feeling that the fed had been waiting for the new successor to tweak rates, with the FOMC not wanting to really rock the boat before Yellen’s departure. The next risk assessments will be made in the coming months as will the latest economic forecasts, this, in turn, should bolster the decision to raise interest rates in March and offer further guidance on future rate hikes.
The EUR/USD retraced in the lead-up and delivery of the FOMC with markets with the EUR/USD slipping from 1.2462 to 1.2412 in the trading sessions. EUR/USD has been weakening slightly from its 3 year high of 1.2504 however, the currency pair seems to continually strengthen, this strength did not appear completely uninhibited by Draghi’s recent ECB minutes.
Whilst Trump, arguably unjustly may lay claim to the record-breaking stock market activity, potentially he has a stronger claim in taking for credit in diluting the dollar. The constant controversial manner he goes about his business has steered investors from the Dollar to the Euro.
EUR/USD remains not far from the three years high achieved a short while ago. The eurozone’s data continues to consistently perform well and despite a few hiccups politically the zone seems assured. It would appear that Draghi and his colleagues at the ECB have bigger fish to fry before they focus on the Euros spiralling strength, the challenge, however, will be finding a suitable remedy when it becomes an issue.
Despite Draghi ‘s apparent complacency the ECB will have to compete globally and will without doubt attempt to challenge for supremacy in the ‘currency wars’ battle. As the global recovery continues an over-performing currency will start to take its effect which will almost certainly be to the eurozone detriment, especially as there is so much talk about new trade deals and trading partners.
The king (queen) is dead, long live the king
This month marks the end of an era. The era began in February 2014 when Janet Yellen took the reigns as chair of the Federal reserve bank. At that time the Fed was printing bonds as part of the quantitative easing program just to keep the US economy functioning. Yellen now departs having achieved maximum with the unemployment rate having fallen from 6.7% to 4.1%
The quantitative easing program has been expertly managed by Yellen and the FED who decreased the Feds bond buying program from $4.5 trillion.
Yellen has also left us with a fully reviewed banking system and tighter regulation, these include the Dodd-Frank act all of which have been designed to protect us from another financial crash.
She now officially hands the baton to Jerome Powell; typically Fed chairs have the opportunity to cover two terms however as a staunch democrat Trump has chosen to not re-elect Yellen. Powell clearly fits the bill and has received a strong endorsement from Trump. Powell is regarded as a moderate pro tightening therefore many anticipate he will carefully change monetary policy and slowly increase interest rates.
He is expected to spearhead Trump campaign to deregulate much of the financial services or at least loosen regulation.
Many believe that due to the pressure he may receive from Congress his trickiest task may indeed maintaining the Feds autonomy from the Trump administration.