The FED, the Dutch, the BoE and the Pound

Dollar weakness continued through the Asian session today, the markets continuing to respond FOMC’s economic projections, the disappointment of the decision to leave the rate path and economic growth forecasts unchanged.

The FED

There had been hopes of a more hawkish FOMC, but with the uncertainty over Trump policies that had held the FED in a holding pattern at the start of the year persisting, there was little incentive for the FOMC members to upwardly revise the outlook for growth and deliver a more hawkish rate path.

The move plays into the hand of the U.S administration, the FED managing to deliver a weaker Dollar despite the rate hike, though it may only be a matter of time before the FED takes a more hawkish outlook on monetary policy, should Trump move ahead and deliver a fiscal stimulus package together with tax reforms in the months ahead.

The Dutch

With the FOMC weighing on the Dollar, the EUR hit an intraday high of $1.0746, market relief over an Establishment victory in the Netherlands giving the EUR a bounce ahead of the European open.

Exit polls showed a Rutte victory, with more than 80% of voters turning out. Rutte’s party is estimated to have taken 33 seats, a loss of 8 from 2012, with Wilders coming in second with approximately 20 seats. While Rutte’s victory had been correctly forecasted by the polls, the biggest surprise may have been the demise of the Social Democrat PvdA party, exit polls pointing to a 9-seat gain, tumbling from 38-seats. The demise of the PvdA means that the Rutte will need to forge new alliances in forming a coalition, with the Eurogoup leader and head of the PvdA likely to have to give up his position as the head of the Eurogroup and quite possibly the PvdA.

A populist victory was expected to weigh heavily on the EUR, but the Eurozone looks safe for now, Draghi seemingly justified over his lack of concern over the rise of populist governments, the Dutch elections having been described as a barometer of populist government support across the region.

Rutte will now move towards forming a coalition, most likely with the Christian Democrats and Democrats who are considered centre to centre-right and possibly the Green Left Party, which picked up an estimated 14 seats, support from the other parties over the issues with Turkey suggesting that there will be little issue for the liberals to garner the 76 seats required for a majority.

Negotiations will likely take some time and even months, with the clear fragmentation in Dutch politics suggesting that at least 4 parties will be needed to form a coalition, each likely have demands at the ready.
Focus will now shift to the first round of the French elections next month, though Le Pen will be considered a far stronger candidate than Wilders, with France a different beast altogether, from an economy perspective.

And the BoE

So, with the main events of the week leaving the markets with mixed feelings, the focus for the day ahead will be on the Bank of England’s monetary policy decision and more importantly, the MPC meeting minutes, which are scheduled for release this afternoon.

The pound has seen a significant pickup in volatility and, while much of the volatility is attributed to Brexit, market sentiment towards monetary policy has been a contributory factor.

Retail sales has been on the slide since December and 4^th quarter growth was largely attributed to the services sector. January’s weaker than expected wage growth figures released on Wednesday together with the continued pickup in consumer prices leaves the BoE in a difficult predicament, with pressure likely to be building on the BoE to shift from its recent neutral position.

Further monetary policy easing will certainly lead to another jump in consumer prices and with inflation sitting just shy of the BoE’s 2% target, Carney will be unwilling to allow inflation sit above 2% for an extended period of time, a likely outcome should the BoE cut rates further.

There’s been no forward guidance, members of the MPC being particularly quiet in recent weeks, which will leave the pound exposed this afternoon should the MPC give the markets any indications of a shift away from its neutral position.

The risk of any further easing will be considered limited with the BoE having to consider the effects of Brexit on the economy, but with inflation remaining the biggest risk to the economy over the near-term, this afternoon’s minutes will certainly be of interest.

Across the Pond

Macroeconomic data scheduled for release out of the U.S includes February housing sector and manufacturing stats together with the weekly jobless claims figures. The cautious message from the FOMC is unlikely to be influenced by today’s stats, the markets and the FED now needing time to consider what factors can lead to a revision to the latest projections in the months ahead, inflation certainly one.

At the time of the report, cable is down 0.21% at $1.22647, the markets a little edgy ahead of the MPC, with the Dollar Spot Index down just 0.04% at 100.7, recovering from an intraday low of 100.43, with the EUR also giving up intraday gains, down 0.24% ahead of the release of finalized February inflation figures out of the Eurozone this morning, with the markets likely to have oversold the Dollar in the wake of the FOMC economic projections and the euphoria over Rutte’s victory most likely abates through the day.