Above: Fed Chair Yellen and her team saw a weaker inflation profile for the US in the year ahead.
The January FOMC minutes have indicated that the US Federal Reserve is increasingly concerned about downside risks to inflation.
Inflation was seen to have declined further below the Committee’s longer-run objective, largely reflecting declines in energy prices.
The news was taken by markets as a sign the Fed may be less enthusiastic about raising interest rates than markets had been expecting.
The pound to dollar exchange rate (GBP/USD) rose in response to the observation.
At the time of writing the pair is trading at 1.5384. This is a solid comeback from year lows of 1.5000.
Indeed, it appears that the recent loss in momentum in the dollar exchange rate complex could be here for longer than many had been expecting.
Daniel Been, Senior FX Strategist at ANZ in Sydney tells us he thinks the USD held up relatively well considering the tone of the Fed minutes.
“The testimony from Chairperson Yellen next week will now be critical for the USD. If she remains dovish then the USD is at risk of a more significant test lower, though this is not our central case,” says Been.
Federal Reserve Optimistic on the Outlook
While short-term pressures may be setting in for the USD, we note that the longer-term timeframes continue to advocate for a stronger Greenback.
This is largely because the Fed will inevitably start raising interest rates.
“We maintain our baseline forecast for a June rate hike at this juncture, but the risk of a later takeoff has risen, particularly if downside surprises on core inflation continue,” says Michael Gapen at Barclays.
Barclays will look to Chair Yellen’s comments in front of the US Senate and House of Representatives next week for further clarification on the committee’s thinking.
Technical Outlook for the British Pound / Dollar: End of the Uptrend
"GBP/USD is holding its near term uptrend at 1.5401. The market has reached the 23.6% retracement of the move down from July 2014 this is located at 1.5481," says Karen Jones at Commerzbank.
Jones tells us the Elliott wave count on the daily is suggesting this should already be the end of the correction however the market looks bid.
A drop below near term uptrend and the 20 day ma at 1.5250 is needed to alleviate the immediate upside.
"Above 1.5490, key resistance is the 1.5855 November 2013 low. Below the 20 day ma should trigger a slide back to the 1.4953 recent low and the 1.4813 2013 low," says Jones in a forecast note to clients.
Jobless Claims Data Continues to Deliver Surprises
Another week and another surprise in the volatile jobless claims data series.
US initial claims fell by 21,000 to 283,000 in the week ending February 14, 2015, almost fully retracing an unexpectedly large 25,000 increase to 304,000 (unrevised) in the previous week.
The decline in the latest week was even greater than market expectations for claims to drop to 290,000.
“The volatile pattern in initial claims seen during the past two months continued with a fairly significant decline in the latest week following an unexpected jump in the previous week,” says Josh Nye, Economist at RBC Economics.
Nye notes claims have been somewhat volatile even on a trend basis, although the recent pattern seems to be one of improvement, with the four-week moving average falling consistently during the past month.
“Given the extremely robust pace of job growth in recent months (the three-month moving average of non-farm payrolls is at a 17-year high) and diminishing amount of slack remaining in labour markets, we expect some retracement will result in modest but still solid job growth in February,” says Nye.
Any sign that job growth will ease will certainly be seen as a negative for the USD.
If so, the February rally in the pound / dollar exchange rate could well extend into March.