Euro-zone M3 money supply growth was in line with expectations at 5.0%, unchanged from the previous month, but there was an improvement in private lending growth. ECB council member Makuch stated that further easing is not ruled out, although he personally doubted whether there was scope for further interest rate cuts. US consumer confidence was stronger than expected at 96.2 for March from 94.0 previously. The dollar was unable to make any significant headway after the data and was then subjected to heavy selling after comments from Fed Chair Yellen. Comments that the Fed would take a cautious stance on raising interest rates were broadly in line with expectations, but other elements were significantly more dovish than expected. She expressed further concerns surrounding the global outlook with a notable reference to China, also warning that there could be fresh downward pressure on oil prices and renewed dollar gains. Yellen was also concerned over the risk of declining inflation expectations even with some reversal over the past few weeks and she also stated that the Fed had plenty of options to ease policy if necessary. Although there were some references to potentially hawkish developments, she was not convinced that higher inflation would be sustained. The dovish rhetoric overall was significantly different from recent comments by regional Fed Presidents and suggested splits within the FOMC. The US currency was subjected to sustained selling as markets moved to adjust rate expectations with no real expectations of an April move to raise rates and much reduced confidence in a move in June. The Euro pushed to highs around 1.1300 with the dollar index declining the most in two weeks and was unable to secure a recovery on Wednesday.
The dollar was unable to make further headway in European trading on Tuesday and gradually drifted lower with a retreat back below 113.50 in subdued conditions. A sharp decline in oil prices curbed risk appetite and US bond yields drifted lower. The dollar dipped sharply lower following Yellen’s comments and US yields dipped lower again, although the impact was mitigated to some extent by improved risk appetite as equity markets moved higher. US indices pushed to 2016 highs and rising equity markets curbed any potential defensive yen demand. The latest Japanese industrial production data was weaker than expected with a monthly 6.2% decline, increasing concerns surrounding the outlook. There will also be pressure on the Bank of Japan to support competitiveness through a week yen. In this context, markets will be wary over the potential intervention threat as the dollar dipped to lows near 112.20 in Asia.
Sterling was dominated by international developments on Tuesday with a resilient tone even with a sharp retreat in oil prices. It held stronger than 0.7900 against the Euro and eventually strengthened sharply against the dollar after Yellen’s comments. The Bank of England Financial Policy Committee (FPC) stated that conditions for financial stability had deteriorated since the last report in November with concerns surrounding Chinese lending developments. The bank also made some moves to tighten buy-to-let lending checks in an attempt to curb property-sector speculation, although the impact is likely to be limited The latest BMG opinion poll on the EU referendum recorded a small margin in favour of leaving, although it was an online poll and these have tended to indicate stronger support for leaving. Markets will be wary of month-end pressures on Sterling, although the main impact is likely to be choppy trading over the next two days as it held firm against the dollar on Wednesday.
The Euro was able to find support below 1.0900 against the franc on Tuesday and moved above 1.0900 during the European session. The Swiss currency strengthened to beyond 0.9700 against the US currency. Dovish rhetoric from Yellen helped underpin equity markets and risk appetite which curbed potential demand for the Swiss currency on defensive grounds. The National Bank will remain on alert for any significant franc moves and be prepared to intervene if necessary to curb currency appreciation, especially with a weaker US currency.
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