Despite the return of the risk appetite, The greenback is still holding its recent gains across the broad as the US treasuries yields are still able to keep what it had following Yellen first press conference as the Fed’s Chief which lowered the investors dependence on the Fed’s QE.

The differences which have taken place in the money markets among the bonds yields cannot be ignored until and that’s why the greenback is still able to keep its gains versus the Japanese yen despite the risk aversion wave which overwhelmed the equities market following the Fed’s meeting as you can see that the JGB 10 years yield is still below 0.6% while its US counterpart rose with these new expectations to 2.78% weighing on the USD property as a low cost funding currency versus the Japanese yen.

As Yellen has shown higher than expected confidence in the US economy and the US labor market conditions after taking this widely expected decision of cutting the Fed’s QE by $10b monthly widening its acknowledge of the US economic performance than the previously mentioned 6.5% unemployment rate target of keeping at the interest rates at the current exceptional low levels.

The Fed’s members votes are suggesting now rising of the interest rate next year to reach 1% at its end to reach 2% later at the end of 2016 but Yellen has mentioned that it is expected to have the first interest rate hike within 6 months following ending the Fed’s QE which can continue be tapped by the current measured pace.

The Fed is smoothing its way back to normal determining of the monetary policy direction by the interest rate decision by this step which is not looking strange after unemployment rate has fallen to 6.6% in January in favor of broader economic figure can tell about the growth outlook and inflation outlook as usual before adopting this forward guidance and that what is running also in UK after the ILO unemployment rate got closer to its 7% target which has been adopted as a forward guidance to the market too after Carney took the office of King last July and you can see that the minutes of the last meeting of MPC has shown this week that it has dropped targeting this rate depending on a wider range of information to express about the performance of the economy too.

Now the markets can be less sensitive to the ILO figures than before and also less sensitive to US unemployment figure in the next releases after it could attract the investors’ eyes as the same as the non-farm payrolls do in the recent releases of US labor reports.

While the ECB can show now that it appreciates taking another stimulus step, with the rising of the borrowing costs in the US money market which can be followed by similar reaction in EU as usual and as what has been last year on increased market expectations of having a start of QE tapering before the ECB went to adopting the forward guidance way to calm down the markets and weigh down on the bonds yields telling that the economic case is not the same in EU as it is in US.

The ECB president last week has told the markets that by this forward guidance to maintain the current interest rate at the current low rate or may be lower, the real interest rates got lower and the single currency came under pressure.

The single currency has not been able to continue rising to 1.40 to be satisfied by reaching 1.3966 before retreating to the current levels after increasing selling momentum on the new Fed’s expressed view about the US economy.

Anyway, the single currency potential appreciation has been expected to be well- exposed to such vocal interventions which could be repeated from other the ECB’s members on this negative impact on the EU exports and also as the single currency appreciation stands as a hindrance in front of having higher inflation rates while the EU economy is suffering from emerging deflation pressure.  

Kind Regards
 

FX Market Strategist

Walid Salah El Din

Mob: +20 12 2465 9143

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