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FOMC Minutes Re-enforce Dovish Sentiment

The FOMC minutes yesterday have helped to push the Dollar lower across the board. There is nothing left to stand in their way now with inflation close to 0% and the overall economy stagnant it seems the only avenue of escape for the largest economy in the world.

The question is what will happen to the dollar once they do expand their easing policy, if yesterdays reaction was anything to go by then it seems the dollar will be sold off any transferred to the other ‘safe haven’ currencies.

Whether the pound will be able to hold its own is another thing altogether, we have gradually seen the value of the pound drop drastically over the past few weeks. The government seems to be backing a weak pound policy and the BOE seem are happily talking the pound down.

Interest rates in the UK are likely to remain at this low level for a long time. This view was re-enforced by Housing Minister Grant Shapps,

“Britain needs interest rates to stay low for as long as possible to help its property market become “steadier” without swings in prices that make homes unaffordable. “It’s really important that we keep interest rates low for as long as possible,” Shapps said at a conference for the homebuilding industry in London yesterday. “The biggest problem at the moment is that people can’t afford to buy your product because they can’t get the lending to get it.”

Low interest rates, low output, dropping house prices, dropping inflation and the ever-present spectre of additional quantitative easing give currency traders a whole plethora of reasons to sell the pound.

The Euro was also helped by hawkish comments from European Central Bank Governing Council member Axel Weber yesterday. Citigroup analysts said the euro may have further to go given relative expectations for interest rates as given by the 2-year euro-sterling swap rate differential.

However, current levels may not be sustained because investors may be getting too dovish on the BoE and too hawkish on the ECB, they said.

“We think that euro/sterling could remain supported going forward. However, the gains beyond current levels could be less pronounced than in recent past,” they said in a note.