After an eventful last week, the start of this one has been very quiet so far. Monday saw minimal volatility across the majors as the dollar extended its NFP-related rebound against the commodity currencies but declined slightly versus the euro. The single currency rose despite data showing German industrial production unexpectedly fell 1.1% in June.
The British pound/U.S. dollar currency pair suffered a double whammy on the last two days of last week, resulting in a 245-pip drop from the week’s high to the low. First, it was the Bank of England on Thursday, which came across as less hawkish than expected as only two members voted for a rate rise, followed by a surprisingly strong U.S. jobs report on Friday.
The dollar bulls will certainly want to see a bigger-than-expected rise in the average hourly earnings index. But at 0.3% m/m, expectations are running high and as such the scope for disappointment is there. Meanwhile Canadian employment figures are expected to have risen last month at a slower pace of 13,000 compared to last month’s 45,300 figure.
The Bank of England has left interest rates unchanged with only two of its MPC members voting in favour of a hike this month. No other rate setter decided to join Michael Saunders and Ian McCafferty on this occasion, and this disappointed some market participants who were hoping that more would join them.
Prior to the release of the July FOMC statement yesterday, the dollar had found some support and gold had weakened slightly. Market participants were wary of the possibility of a hawkish surprise, so they had taken profit on their short dollar positions. But once speculators realized that wasn't the case, they evidently re-established those positions and the dollar responded by dropping across the board.
The market’s focus will be on the FOMC later on today. Investors will be fully anticipating the Fed to come across as more dovish than hawkish. But that view may already be priced in, so it will be interesting to see how the dollar will react. The U.S. currency has bounded back a touch over the past couple of days, especially against her weaker rivals such as the Swiss franc and Japanese yen.
Central banks are the key catalysts for currency directions. By setting interest rates and monetary policy, central banks generate either bullish or bearish expectations about the currency direction. Central bank statements are carefully constructed, where each word is compared to the previous statements. Any differences between statements impact immediate market reactions.
Ahead of the ECB meeting, euro traders are approaching things with a bit of caution today, apparently taking profit on their long positions with the EUR/USD and EUR/GBP both easing back a little. However, it has been a minor retracement so far and I would not be surprised at all if the single currency were to turn positive again in the afternoon.