Fed Returns to Dovish Tones, Dollar Generally Weaker

Weekly Report - 20/03/2016

Fed Returns to Dovish Tones, Dollar Generally Weaker


Leaving interest rates unchanged at the FOMC meeting last week, the Federal Reserve sent a dovish tone and is now projected to hike the Fed funds rates only twice for the remainder of the year. The markets closed out another busy week with central bank decisions being at the forefront. Last week saw the Bank of Japan (BoJ), Bank of England (BoE), The Swiss National Bank (SNB), Norges Bank and the Federal Reserve all releasing their monetary policy decisions.

Weekly Review

Interest rates were left unchanged by most of the central banks last week, but going by the monetary policy statements and comments, the outlook remains bleak and biased to the downside. The Bank of Japan decided to leave interest rates unchanged and instead opted to wait for the lowering of interest rates further into negative territory, a move it made in January, to influence the economy. While committing itself to the 2.0% inflation target rate, the BoJ did however sound cautious in its ability to meet the inflation mandate. Further action from the BoJ is expected in its April meeting.

The Norges Bank cut interest rates by 25bps at its meeting last week and signaled further rate cuts could be possible, although at a slower pace. The NOK initially weakened on the news but soon managed to trim its losses. The BoE and the SNB decided to leave rates unchanged but stuck to the usual rhetoric. The Pound however surged as the BoE hinted that rates were more likely to rise than fall. Next week's CPI data will be closely watched for any signs of an uptick in inflation following the pickup in average wage earnings which increased 2.10%, beating forecasts of 2.0% increase, according to data released by the Office for National Statistics.

The Federal Reserve's FOMC meeting was the big event however. Fed funds rates were left unchanged as widely expected, but against market expectations that the Fed would sound hawkish, the dovish tone saw a selloff in the US Dollar. Most of the currencies gained against the Greenback over the week as a result.

Oil prices also gained strongly over the week posting a fifth consecutive week of gains confirming that the bottom was formed near the lows of $26. WTI crude oil prices gained as the markets expect to see a follow through for coordinated production freezes while the US oil rig counts continue to decline due to financial distress of the shale oil producers. WTI crude oil for April delivery settled Friday at $39.30 per barrel.


The Week Ahead

The week ahead is expected to be quiet in terms of economic releases following the busy start to the month. While Monday is expected to be quiet, US existing home sales data is due with expectations of a decline of -2.40% for the month of February. This comes following January's modest increase of 0.40%, which came out better than the forecast for declines. On Tuesday, UK's inflation data is due with expectations that the monthly headline CPI increased 0.80% for the month of February. The expected spike in the CPI comes following the uptick in average wage earnings. Better data could see the GBP remain supported to the upside. Data from Eurozone is limited to flash PMI's and current account data, which is likely to see the Euro trim its gains from the strong bullish trend over the last week. US durable goods orders numbers are due and another weak month is expected with forecasts showing -2.40% declines on the headline and -0.20% decline on the core. With the Fed staying put last week and signaling a slower pace of rate hikes, weak economic data is likely to see the Dollar continue to weaken.


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