Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 23th of August.
The US Fed’s last FOMC minutes released yesterday came as a surprise for many market participants as the central bank struck a more dovish tone than expected. The introduction of unconventional monetary-policy measures has been widespread to tackle the global financial crisis; namely quantitative easing, credit easing, currency and security market interventions and credit support.
Many argue the above measures are an extension of a standard policy. Once nominal interest-rates hit rock bottom, central banks explore other tools to determine the next policy stance. They inject liquidity and expand balance-sheets to influence the shape of yield curves and thereby stimulate aggregate demand. However, when central banks exit from non-standard measures, they must unwind unconventional policies before hiking interest rates.
It is also possible to set interest rates near zero using standard practice for price stability. Still irrespective of the nominal interest rate level, the benefits have often been poorly transmitted to the economy, especially in times of severe crisis. Market functioning gets hindered in times of financial crisis and non-financial measures help clear roadblocks.
That being said, policy makers need not unwind non-standard policy measures or push interest rates to near-zero before exiting. For an effective exit strategy, standard and non-standard policy measures can be measured independently. While standard measures depend on mid- and long-term price stability outlook, non-standard measures depend on the degree of imparity in the transmission of monetary policy.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.2657
GBP/US$ – 1.5887
GBP/CHF – 1.5204
GBP/CAN$ – 1.5728
GBP/AUS$ – 1.5124
GBP/ZAR – 13.0851
GBP/JPY – 124.82
GBP/HKD – 12.3321
GBP/NZD – 1.9446
GBP/SEK – 10.5381
EUR: The single currency hit a new 7-week high against the greenback yesterday breaching the 1.2500 level after the US Fed’s last FOMC meeting minutes struck a more than expected dovish tone, with most members favouring further quantitative easing by the central bank in Sep. Continued optimism for another round of peripheral bonds purchase by the European Central Bank was another reason for the single-currency’s strength. The GBP/EUR pair finished lower at around 1.2640 on the back of a strong EUR/USD pair despite starting the day higher at 1.2693. The single-currency is expected to be driven by speculations over further QE by the Fed even though flash PMI from Europe should generate interest. The GBP/EUR is expected to be range-bound ahead of UK Q2 GDP’s second iteration.
USD: The greenback witnessed a selloff against most of its global peers yesterday after the release of surprisingly dovish FOMC minutes in Washington yesterday. The majority of members believed further monetary stimulus will be required unless the economy shows signs of durable growth. Cable rallied soon after the release, pushing the GBP/USD pair to a fresh 3-month high of 1.5872. We have the CBI distributive trades survey due today and some firmness in reading is expected due to the just concluded summer Olympics. The US jobs and housing data is due today and continued strength will diminish chances of further monetary stimulus. GBP/USD pair opens at 1.5899 this morning.
Have a great day!