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Analytics, News, and Forecasts for CFD Markets: currency news — 21-04-2024.
French central bank chief Francois Villeroy de Galhau said on Sunday that tension in the Middle East is unlikely to drive up energy prices and should not affect the European Central Bank’s (ECB) plans to begin cutting interest rates in June, per Reuters.
Key quotes
"Barring surprises, there is no need to wait much longer.”
"It should be followed by further cuts, at a pragmatic pace,"
"At the moment, the conflict is not leading to a marked rise in oil prices. If this were ever the case, we would have to analyse monetary policy for whether this shock is temporary and limited, or whether it is transmitted—beyond commodities—to underlying inflation”.
Market reaction
These comments have little to no market reaction to the Euro. The EUR/USD pair is trading at 1.0659, adding 0.03% on the day.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
First Deputy Managing Director of the International Monetary Fund (IMF), Gita Gopinath, said on Saturday that the United States needs to raise revenues to bring down high budget deficits, even though they are helping to fuel global growth by stoking domestic US demand.
Key quotes
"The high levels of deficits are also supporting growth and demand in the U.S. that have positive spillover to the rest of the world.”
"But along with that growth, you're getting higher interest rates and a stronger dollar and the second two are creating more complications for the world.”
“IMF's estimates that the U.S. deficit for 2024 will reach 6.67% of GDP, rising to 7.06% in 2025, double the 3.5% number in 2015.”
Market reaction
As of writing, the US Dollar Index was down 0.03% to trade at 106.08 on the day.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
- AUD/USD holds below 0.6450 in Monday’s early Asian session.
- The hawkish comments from Fed officials in recent weeks have lifted the Greenback.
- The moderate Australian inflation data and the continuously tight labour market could prompt RBA rate cuts this year.
The AUD/USD pair remains on the defensive near 0.6420 during the early Asian session on Monday. The Federal Reserve (Fed) media blackout went into effect at midnight Friday. Nonetheless, the US central bank has delivered hawkish messages in recent weeks and markets expect the first cut in September.
On Friday, Chicago Fed President Austan Goolsbee said that inflation progress had “stalled and the Fed’s current restrictive policy is appropriate. Meanwhile, Atlanta Fed President Raphael Bostic, one of the most hawkish members of the FOMC, stated that the US central bank wouldn’t cut rates until the end of the year. The chance of a June cut has fallen below 20% and the odds of a July cut have dropped below 50%. A September cut is not fully priced in, with the probability falling below 90%, according to the CME FedWatch Tool.
The hawkish stance from Fed officials in recent weeks provides some support to the US Dollar (USD) and creates a headwind for the AUD/USD pair. Investors will take more cues from the US inflation data this week. The final reading of the US March Personal Consumption Expenditures Price Index (PCE) will be due on Friday. Headline PCE inflation is estimated to rise to 2.6% YoY, while the core is expected to fall a tick to 2.7% YoY.
On the Aussie front, inflation is still above the Reserve Bank of Australia’s (RBA) target but continues to moderate in line with the RBA’s latest forecasts. The continuously tight labor market could prompt those calling for an RBA rate reduction before the end of the year, which might drag the Australian Dollar (AUD) lower against the Greenback. The Australian Consumer Price Index (CPI) on Wednesday will be a closely watched event. Investors may push back the expected timing of rate cuts if the inflation data is hotter than expected, which might cap the downside of the AUD/USD pair.
Bank of Japan (BoJ) Governor Kazuo Ueda spoke at a seminar hosted by the Peterson Institute for International Economics on Friday. Ueda said that the Japanese central bank "very likely" will raise interest rates if underlying inflation continues to go up and begin reducing its bond-buying in the future, though the timing undecided.
Key quotes
“BoJ must maintain loose monetary policy for the time being as underlying inflation remains "somewhat below" its 2% target, and long-term inflation expectations are still near 1.5%.”
“BoJ will also begin to cut its purchases of Japanese government bonds (JGBs) (timing and extent of the reduction are yet to be determined).”
"Irrespective of what the data will say in the near future, we will like to find a way and timing to reduce the amount of JGB purchases.”
"If underlying inflation continues to go up, we will very likely be raising interest rates.”
Market reaction
The USD/JPY pair is trading at 154.62, losing 0.01% on the day at the time of writing.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.
The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
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