Forex Market Review (European Session) – US dollar plunges on Yellen’s dovish talk; loonie up on BOC interest rate hike

Forex Market Review (European Session) – US dollar plunges on Yellen’s dovish talk; loonie up on BOC interest rate hike

The US dollar plunged against the yen and other major peers following the release of Federal Reserve Chair Janet Yellen’s monetary policy report to Congress. The loonie gained against the greenback after the Bank of Canada announced an interest rate increase at its monetary policy meeting today.

The Fed Chair Janet Yellen in her opening remarks to Congress took a positive stance on the labor market and the US economy. She said job gains were above the bank’s estimate and that the economy picked up in the second quarter on a rebound in household spending and stronger overseas demand helping US manufacturers. However, she acknowledged that the Fed was uncertain about when US inflation would pick up as a response to the strengthening economy. Further to this, the Fed Chair said how she saw “roughly equal odds that the U.S. economy’s performance will be somewhat stronger or somewhat less strong than we currently project”. This was perceived as less confident and more dovish than in the recent past. Odds for additional hike this year are now close to 40%. The dollar plummeted against the yen following the release of the monetary policy report. Dollar/yen breached the 113 handle immediately following the release, but managed to recover slightly as the Fed Chair started her testimony and was last trading at 113.17.

The BoC raised its benchmark interest rate by a quarter of a percentage point to 0.75% during today’s policy meeting as expected. The bank cited recent strong data that bolstered confidence in stronger growth. At the same time, the BoC expressed the need to look through recent soft inflation. However, it did not commit to a path of interest rate hikes as the bank wants to keep a close-eye on future economic developments. Even though this decision was widely expected, the Canadian dollar gained significantly against the US counterpart. Dollar/loonie fell to 1.2788 following the release of the decision from 1.2905 before, for a daily loss of 0.94%.

Unemployment in the UK fell to a 42-year low in the three months to May, figures out today showed. At 4.5%, the ILO measure of unemployment is below the forecasted level of 4.6%. In the three months to May, average weekly earnings, excluding bonuses, rose by 2.0% year-on-year, above consensus estimates of 1.9% and above the 1.7% recorded in August. Including bonuses, earnings grew 1.8%, in line with consensus, but below the prior month’s 2.1%.

Looking at the forex market reaction, sterling firmed against the dollar amid the string of upbeat data today. The pound rose 0.3% to $1.2880 as the European session was about to close. However, real wage growth is declining as it is being outpaced inflation, signalling a strain on household spending and future economic growth. UK pay including bonuses, adjusted for inflation, fell 0.7% in the three months to May – the sharpest drop since mid-2014. This may induce a more dovish-tone among the Bank of England Monetary Policy Committee members.

The euro weakened against the dollar linked to the fall in Germany’s 10-year bund yield during the day. Euro/dollar was last trading at $1.1412.

Looking at commodities, oil prices continued to gain following the report showing that the US crude and gas stockpiles as of July 7, fell more than expected. The US Energy Information Administration report showed that crude oil inventories fell by 7.6 million barrels, more than the forecasted draw of 2.9 million. Following the release, WTI was trading at $46.48 a barrel and Brent was at $48.29.

Gold prices rose on the back of dollar weakness, with the precious metal last trading at $1,222.30 an ounce as the European session was about to close.

Source: Trade Forex with XM.

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