US Dollar, Japanese Yen Gain as FOMC Minutes Reflect Dreary GDP, Unemployment Outlooks

The US dollar and Japanese yen were amongst the stronger currencies on Wednesday, though we’ve seen little in the way of “breakouts”, as the release of the Federal Open Market Committee’s (FOMC) meeting minutes from March wasn’t exactly groundbreaking since there was little in the way of new details revealed. During March, the FOMC left the fed funds target range at 0.0 percent - 0.25 percent but the big surprise was that they officially announced quantitative easing efforts. The only noteworthy part of the minutes was that the FOMC staff projections for the second half of 2009 and 2010 were downgraded from the FOMC’s long-run projections for growth, unemployment, and inflation in January. While the exact revisions were not published, the minutes did say that GDP was expected to “flatten out gradually over the second half of this year and then to expand slowly next year,” and that this “weaker trajectory of real output resulted in the projected path of the unemployment rate rising more steeply into early next year before flattening out at a high level over the rest of the year.” All told, this suggests that Q3 and Q4 GDP results aren’t likely to show any sort of recovery, while the unemployment rate could breach the upper range of the FOMC’s projections of 9.2 percent, and perhaps reach double-digits.

Looking ahead to Thursday, risk trends are likely to remain the primary driver of US dollar and Japanese yen price action. There will be a few US economic indicators on hand, including the trade balance (expected to have held steady at -$36 billion in February), the import price index (expected to have risen 0.9 percent in March, but remain down 14.7 percent from a year ago), and jobless claims (initial and continuing claims should remain near record highs).

British Pound Lags Ahead of BOE Rate Decision on Thursday - What to Watch For

The British pound slumped versus most of its major counterparts, despite the fact that for the first time since the summer of 2008, the Bank of England is expected to leave rates unchanged on Thursday. Indeed, both Credit Suisse overnight index swaps and a Bloomberg News poll of economists reflect forecasts that the BOE will leave the Bank Rate at an all-time low of 0.50 percent at 7:00 ET on Thursday. A look at their March 5 policy statement shows that the BOE’s Monetary Policy Committee (MPC) expects both growth and inflation to fall lower in coming months and also announced a new 75 billion pound asset purchase program, which included the buying of medium and long-term gilts. Ultimately, how the British pound responds will likely depend on two factors: whether or not the BOE asserts that they want to avoid cutting the Bank Rate to zero, and whether or not they indicate that they want to expand their quantitative easing (QE) efforts. Signs that the BOE is open to reducing rates further or signs that they will increase their gilt purchases could weigh heavily on the British pound, especially against the euro, while the opposite (steady rates, no QE expansion) could provide a boost to the UK’s currency and lead EUR/GBP back below 0.9000.

Euro Slips Further as Ireland’s Credit Downgrade by Fitch Adds to ECB Rate Cut Risks

The euro remained under pressure versus most of the majors yet again as evidence continues to point to another rate cut by the European Central Bank (ECB) and a move toward quantitative easing. Yesterday we saw that the final reading of Q4 GDP was unexpectedly revised to a new record low of -1.6 percent from -1.5 percent, due primarily to downward revisions to gross fixed capital formation (capital goods investment) to -4.0 percent from -2.7 percent. We also saw, ECB Governing Council member George Provopoulos say during an interview that the bank’s benchmark rate could be cut by at least another 25 basis points, as he did not “see 1 percent as a threshold,” and that he would “not exclude that the ECB could go down further from this level if the economic environment deteriorates further.” Then, today, Fitch announced that they had downgraded Ireland’s sovereign credit rating to AA+ from AAA, and issued a negative outlook. While S&P already did the same on March 30, the news only highlights the extent of the economic woes for the Euro-zone. All told, Credit Suisse overnight index swaps are now pricing in a 36 percent chance of a 25 basis point cut to 1.00 percent during the ECB’s next meeting, up from 22.5 percent on Tuesday, but there is plenty of time for market expectations to shift ahead of that May 7 meeting.

Canadian Dollar Could See Breakouts on Upcoming Canadian Employment Figures

The Canadian dollar held up rather well on Wednesday, as USD/CAD continues consolidating within a large triangle formation and above key trendline support near 1.2300. A break higher or lower could be in the cards in the near-term, though, as Canadian economic data will be released on Thursday. At 7:00 ET, reports are forecasted to show that the Canadian net employment change fell by 50,000 during March, marking the fifth straight month of job losses. Furthermore, the unemployment rate is anticipated to have risen to match January 2002 high of 8.8 percent from 7.7 percent. Since the employment change tends to be a very volatile release, this should have the greater impact on the Canadian dollar, with a sharper than expected drop likely to push USD/CAD higher, while an unexpected positive result could weigh the pair below 1.2300.

Terri Belkas is a Currency Strategist at FXCM.