Central Bankers Fueled Forex Market Volatility

Major Central bankers, including Federal Reserve, Bank of Japan (BoJ) and the Reserve Bank of New Zealand (RBNZ), rattled the Forex market during late Wednesday and on Thursday as well. While all three central banks refrained from altering current monetary policies, the BoJ trimmed its inflation forecast, the RBNZ played dovish tune and the Fed kept playing with words to signal that they are capable enough to meet the inflation target and chances of an interest rate hike during the later part of the year can’t be denied.

FOMC And The GDP Provided Additional USD Weakness

With headline economic details already forcing the greenback to liquidate nearly 4% of its gain during the month of April, Advance reading of Q1 2015 GDP that grew at a least pace in a year, with 0.2% number, against 2.2% final reading of Q4 2014 GDP, provided additional slump to the USD; however, the greenback recovered a bit during its FOMC trading when the monetary policy committee (MPC) signaled chances of meeting its 2.0% target inflation and increasing benchmark interest rate during the later part of the year. The US Dollar, then restored its decline on Thursday when market players perceived the inability on the part of the FOMC to meet its promises of an interest rate hike.

Looking from the broader perspective the GDP reading grew at a least pace in a year, with 0.2% number and the FOMC did say that the current scenario restricts the monetary policy committee (MPC) from altering their current monetary policy. However, digging deeper into details, give meaningful information to determine the near-term USD moves.


The US GDP grew lesser than the expected and with the least pace in a year, but bad weather conditions coupled with the stronger USD, that hindered US export market, could be tackled soon and the US GDP is likely meeting their forecast of growing between 2.1% to 3.1% during the current year. Hence, even if the broader reading was disappointing, it isn’t showing a closure to optimism and hence the upcoming, second and the third (final), revisions to the reading are more important to gauge the actual growth figure.

Moving towards the FOMC, the policy makers said “economic growth slowed during the winter months, in part reflecting transitory factors. The pace of job gains moderated, and the unemployment rate remained steady. A range of labor market indicators suggests that underutilization of labor resources was little changed.” However, these reasons of hindering the chances of interest rate hike are being mitigated in the later part of communication where the MPC said “The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term”.

So, the FOMC, in its meeting on Wednesday, did spell negatives that are currently restricting monetary policy change; however, they are optimistic enough to beat these obstacles and enacting the interest rate hike during the later part of the year that in-turn isn’t restricting the market expectations of June or September hike.

However, looking at the thrust of economics, lesser chances support the FOMC optimism and it seems that they have only played with words to avoid spreading too much of pessimism and only a continuous flow of improvement in Inflation and labor market details could give them opportunity to increase the benchmark interest rate for the first time since 2006.

To sum up, the USD is reflecting weaker economics and is likely to continue doing so unless there are consecutive positive details, either relating to labor markets or Inflation, that could pave the way for the interest rate hike sooner than later.

Also Read: Technical Update - EURUSD, AUDUSD, NZDUSD and USDCAD

RBNZ and the BoJ Moves

Alike Fed, the RBNZ and the Bank of Japan also stood pat with their current monetary policies; however, dovish tone of RBNZ Governor, Graeme Wheeler, and the cut in inflation forecast by the bank of Japan provided meaningful information to understand NZD and JPY moves.

RBNZ, took place late Wednesday, held its official cash rate (OCR) at 3.5% and changed the bias from the neutral, which supports probably a hike in interest rate or a cut, depending upon the economic releases, to the one that supports a cut in OCR should the situation demands. The central bank Governor said "It would be appropriate to lower the OCR [official cash rate] if demand weakens and wage and price-setting outcomes settle at levels lower than is consistent with the inflation target." Moreover, he also said that the NZD is unjustifiably high and hinders the export demand, the main driver for Kiwi economy, supporting more of the weaker side of the NZD. The Kiwi, as the New Zealand Dollar (NZD) is sometimes termed, provide stiff response to the meeting’s outcome and plunged nearly 2.0% in its post meeting trading sessions.

As the chances of an interest rate, that were present until now, are being denied by the RBNZ head, with the dovish comments, it can be expected that the NZD should behave negatively unless there are strong economic numbers or the central bank reiterates the wording that again supports the hawks.

Bank of Japan maintained its monetary policy intact with 80 Trillion Yuan’s yearly monetary easing target and refrained from introducing additional monetary measures. However, the central banker cut its forecast for meeting 2.0% inflation target from current fiscal year to April-September 2016. It also cut its core consumer inflation forecast, for current fiscal year, to 0.8% from 1.0% in its twice-yearly review of its forecasts. Moreover, the central bank Governor, Haruhiko Kuroda, sounded positive in his approach to economic growth, supported by the rise in export numbers, and the trend inflation, which might help pushing the main inflation higher. The JPY provided cold response to the meeting outcome as the central bank governor sound more optimistic and helped balance the pessimism spread by inflation forecast.

Hence, the BoJ, even if altering the inflation forecast, couldn’t provide much of the weakness to presently strong JPY and looking at the Japanese economics the Yen could become a sound contestant to witness near-term strength, unless there are drastic negatives from economy.

Also Read: Technical Outlook - USDJPY, AUDJPY, NZDJPY and CHFJPY

Other than these central bankers, the Central Bank of Russia also cut down its bench market interest rate by 1.5% to 12.5% from 14.0% on Thursday. The 150 basis point cut in the Russian bench mark interest rate is a third this year after the plunge in Crude oil prices and the geo-political tensions with Ukraine damaged Russian economy in a bitter way.

Shifting towards uncertainty at Greece and UK, it can be sensed that the Greece has repeatedly failed to meet the EU criterion and is supporting the chances of Grexit should it fails in its May 11 meeting. Given the troubled nation’s inability to meet the creditors’ demand, it could pose serious threat to the Euro, that is currently trading positively, mainly surrounded by the positive comments from Greek officials . The UK economy, which would face its general election on May 07, is also facing the uncertainty as no party is gaining clear majority in opinion polls. Should the actual outcome of the election matches the opinion polls, uncertainty surrounding the economic policies could drag near-term up-move of the GBP.

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Anil Panchal
Market Analyst
Admiral Markets

At any use of the analytical material taken from the site of company Admiral Markets, and the secondary publication on any other resources, the rights to intellectual property for a dealing center «Admiral Markets», the reference to the company site is obligatory.

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