Rangebound dollar supported by Interest Rate Hopes

Timing of Fed’s Balance Sheet reduction excites Traders

Recent speeches by FOMC members have illustrated how difficult the task is facing Janet Yellen and her colleagues.

The U.S. economy is not facing an overheating issue like what is happening currently in Germany. However, data releases and general sentiment point towards a need for continual adjustments. Even an employment report which would generally have disappointed is being seen as a blip, a one-off anomaly.

There is one remaining matter which is still overhanging from the measures taken during the financial crisis. That matter is the Fed’s balance sheet. At the height of the crisis, the Fed bought $4.5tn worth of Government bonds in order to add liquidity to a market that was threatening to seize up.

That investment remains on the Fed’s balance sheet and until it is removed, normality cannot return to U.S. monetary policy.

There has been a lot of speculation as to when the reduction will begin. Since measures taken by the Fed., BoE and ECB were unprecedented, no one really knows what will happen when they are reversed. The fear in the U.S. is that the tightening of monetary policy will be so severe it will choke off economic growth entirely.

The dollar index edged down yesterday to 101.95 as currencies remained within well-defined ranges.

Safe haven trades favoured the JPY which rose to 110.68 from a low of 111.57. If the current 110.11 – 112.20 remains intact, traders react to fundamentals as they look for a longer-term trend.

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Trumps finger on the trigger

Tensions in Syria and a spot of meddling from North Korea have driven investors towards the JPY. Despite a great deal of rhetoric, Russia has shown restraint by not reacting to America’s bombing of a Syrian Government Airfield last week. They have, however, been busy in condemning America and her allies.

The G7 which meets this week is likely to condemn Russian backing of Syrian President Assad’s regime. It is a real portrayal of how the market has been for the past few months that the G7, which is essentially a forum to discuss the global economy and monetary policy, is expected to weigh into the Syrian Crisis.

China and South Korea have strengthened sanctions on North Korea. The continued development of a long-term missile capability is concerning many countries. Sanctions have been ineffective since they are constantly being broken by rogue states. Also, North Korean President Kim Jong Un is not averse to starving his population while pursuing what he sees as North Korea’s right to arm itself.

Possible military intervention either by the U.S. alone or in conjunction with a U.N. sanctioned coalition will disturb markets further as recent history has shown us. Surgical strikes need to be effective in their targeting or Asia could see a prolonged campaign like the fate that has befallen Iraq.

U.K. inflation set to continue to divide MPC

Traders are expecting an unchanged headline inflation number today as the “Holy Trinity” of retail prices, consumer prices and producer prices for March are released. Any Consumer price data showing a rise will excite the MPC hawks into declaring the need for a rise in interest rates.

Producer prices will continue to see a significant increase as the effect of the fall of Sterling continues to feed through.

Polls of economists see Producer Prices, year on year rising by 17.2%, a 2% fall from February but still pointing to future consumer inflation. Consumer prices are likely unchanged at 2.3% MoM, with Retail prices also unchanged at 3.2%

Any shock will see the pound react. It fell to a two-week low against a largely stronger dollar, although it held its ground against the Euro. There is strong support at 1.2365 but importers continue to sell on rallies forming a top around 1.2480/1.2500.