Perhaps it’s a little premature to talk about a “currency war”, but what is certain is that the last meetings of the Federal Reserve and the Bank of England have fuelled sharp moves in the major currencies. The euro has extended its year highs against the dollar (it’s over 1,08 against the greenback) and on Thursday it appreciated over 1.3% against the pound (the exchange rate is at 0,86).
The central banks’ cautious messages contrast with the good economic data on both sides of the Atlantic. The US is the clearest example. The private sector created 246,000 new jobs in January, a figure which is way higher than the 165,000 forecast by analysts. In theory, the strength of the US labour market boosted expectations for a more agressive hike in interest rates, but the Fed chose to issue a much more cautious message than was expected.
In her first meeting with Donald Trump at the front of the White House, Yellen only talked about “gradual” rises in rates, without giving any clues on when the next one will be. But, without knowing the new US government’s fiscal measures, the Fed has assured that the US economy has continued to expand at a “moderate” pace and that global uncertainties have declined. For the time being, the market is discounting two further US rate rises for this year and another two for 2018.
A similar situation is happening in the UK. The new forecasts from the Bank of England (BoE) raise GDP growth for 2017 from a previous 1.4% to 2%, but at the same time dampen inflation tensions, which has once again deflated its currency. The members of the BoE monetary policy committee believe that prices are under control, blaming the uptick in the last few months on the falls in the pound as a result of the Brexit victory. The market is now delaying the first hike in UK interest rates to end-2018, from the current 0.25%.
The ECB, for its part, is maintaining its debt purchasing programme, even though inflationary pressures are rising in the Eurozone and, more significantly, voices from Germany are asking Draghi to put an end to low rates and monetary stimuli.