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Central Bank Action Drives Currency Markets

David Becker
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Central Bank Action Drives Currency Markets

Central bank action continues to be the key driver of market activity as accommodative policy stances are expected to help underpin and boost economic growth. Last week both the FOMC and the ECB acknowledged they are in uncharted territory. The Fed Minutes revealed policymaker concerns that there has never been a tightening while holding a large balance sheet, and thought it might be best to consider a range of policy options and be prepared to mix tools as warranted.

The ECB’s Weidmann said negative interest rates are unchartered territory and he warned that the risks and side effects need to be taken into account. These uncertainties among policymakers regarding various policy tools, outcomes, and spillover effects could make for choppy trading over the coming weeks and months.

ECB’s Nowotny says inflation is too low. The Austrian central bank head said, “currently our problem is that of a too-low inflation, which is significantly below the ECB’s target of 2%.”We actually have in many European countries negative inflation rates”, which is in part a “necessary process of adapting, but in part it’s a process where you have to be careful that it doesn’t destabilize inflation expectations”. The comments suggest that Nowotny will be opting for further measures at the June meeting, where another rate cut, including negative interest rates will be high on the agenda.

Italian consumer confidence improved in May, with the overall reading jumping to 106.3 from 105.4. Consensus expectations predicted a slight decline in the headline number, so data were better than anticipated, which is good news and reflects growing confidence in the government’s ability to implement the urgently necessary reforms of Italy’s political and economic system. Meanwhile French consumer confidence remained steady at 85 in May.

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The EURUSD continues to edge lower just barely holding on to support near the 200-day moving average. A break of this level would lead to a test of the February lows near 1.35. Resistance is seen near the 50-day moving average near 1.38.

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