U.S. Dollar Punished by Central Bank Decisions

The U.S. Dollar and the Japanese Yen were the featured currency markets last week as both were influenced by major interest rate and monetary policy decisions.

June US Dollar Index futures, which represents the value of the U.S Dollar relative to a basket of foreign currencies, finished the week at 93.054, down 2.026 or -2.13%. The loss was attributed to weak economic news, and the mixed U.S. Federal Reserve and Bank of Japan monetary policy decisions.

The selling started early in the week with the release of weaker-than-expected U.S. Durable Goods data and consumer confidence results. Later in the week, the dollar was pressured by an Advance GDP figure that came in below expectations.

Sandwiched in between the economic reports was the Fed’s interest rate and monetary policy decision. On April 27, the Federal Reserve left its benchmark interest rate unchanged after a two-day meeting in Washington, and official offered little guidance for when they might be ready to raise it again.

The central bank provided no assessment of risks to its economic outlook –the third time it has omitted what was once a standard analysis. In a carefully worded statement released after its meeting, the Fed said only that it is continuing to “closely monitor inflation indicators and global economic and financial developments.” That represents an upgrade from March, when the central bank singled out international turmoil as a threat.

The Fed also gave a mixed view of the recovery in recent weeks. It noted that the job market has improved, along with household incomes and consumer confidence. But it acknowledge that economic growth has slowed, and consumer spending has moderated. The Fed pointed to strength in the housing sector but softness in business investment and exports.

The most stunning news to hit the Forex markets last week came on April 28 with the release of the Bank of Japan monetary policy decision. The BOJ held off on expanding monetary stimulus, as Governor Haruhiko Kuroda and his colleagues opted to take more time to assess the impact of negative interest rates.

The move came as a surprise because a slight majority of traders and economists had projected some action from the central bank in response to a strengthening in the Yen that cast a shadow over prospects from higher wages and investment.

The Japanese Yen rallied against the dollar immediately after the decision, eventually driving it to an 18-month high later in the week. The USD/JPY finished sharply lower at 106.304, down 5.369 or -4.81%.

The AUD/USD closed at .7606, down 0.0099 or -1.29% after the country reported soft consumer inflation figures. The Aussie broke sharply after data showed Australia’s consumer prices unexpectedly fell 0.2% in January – March, missing the median forecast of a 0.3 percent rise.

It was the first time since 2009 the inflation gauge fell to a negative level, raising speculation that the Reserve Bank of Australia may have to consider rate cuts.

The NZD/USD managed to close higher for the week at .6978, up .0132 or +1.93%. The New Zealand Dollar gained ground against the U.S. Dollar after the Reserve Bank of New Zealand left interest rates on hold, after a cut in March to 2.25 percent.

The RBNZ, however, left the door open to further easing if inflation failed to pick up. It has already cut the official cash rate (OCR) five times in less than a year.

The central bank also expressed concerns about the relative strength of the Kiwi, which is making exporters and import-exposed industries less competitive.

The GBP/USD had a good week, closing at 1.4605, up 0.02167 or +1.51%. The rally was good enough to drive the Forex pair into a new three month high. Traders said that the easing of concerns about a U.K. exit from the European Union helped bolster prices.

Flash Euro Zone Q1 GDP estimates published by Eurostat showed that Q1 GDP growth came in at 0.6% q/q, beating consensus forecasts for a rise of 0.4%. On an annualized basis, Euro area GDP was at +1.6% compared with Q1 2015.

Eurostat also released its flash estimate for Euro Zone CPI inflation in April which showed inflation back in negative territory. April headline dipped by -0.2% y/y in March. Core CPI, which excludes food, energy, alcohol, and tobacco costs increased by a seasonally adjusted 0.8% in April, below forecasts for 0.9% and down from 1.0% a month earlier.

The EUR/USD finished the week at 1.1445, up 0.0214 or +1.91%.

The USD/CAD closed the week lower at 1.2551, down 0.01315 or -1.04%. A surge in oil prices to its highest level since late November helped drive up the Canadian Dollar.