While the markets remain fixated on Wednesday’s FOMC meeting, the latest price action and central bank policies across Europe, Japan, and Australia must not be ignored, either.
The euro (EUR) traded higher against all major currencies on Tuesday thanks to the improvement in Eurozone and German investor sentiment. The Eurozone ZEW survey rose to 30.6 from 27.6, and while investors grew less optimistic about current conditions in Germany, their confidence in future conditions improved, as evidenced by the expectations component of the German ZEW, which rose to 38.5 from 36.4.
With the European Central Bank (ECB) taking additional steps to stimulate the economy, this data indicates that investors are looking for a stronger recovery. In a farewell conference for Bank of Israel Governor Stanley Fischer today, ECB President Mario Draghi talked about ECB monetary policy, saying the central bank would consider non-standard measures including negative deposit rates.
No major Eurozone economic reports are scheduled for release on Wednesday, leaving the market’s focus firmly on the Federal Open Market Committee (FOMC) meeting.
See also: The Fed’s Most Likely Message This Week
Aggressive Selloff in British Pound (GBP)
The British pound (GBP) fell aggressively against all major currencies despite signs of higher inflation. The weakness was driven entirely by demand for EURGBP, which saw its strongest gain in nearly a month.
UK consumer prices increased more than anticipated in the month of May. Economists expected a rise of 0.1%, but CPI rose 0.2% month over month and 2.7% on an annualized basis. The rise in inflation was driven by the previous month's increase in clothing prices and airfares, and a decrease in fuel costs.
The Bank of England (BoE) expects inflation to be around 3% in the third quarter. Many BoE policymakers have rejected Governor Mervyn King's call for more stimulus due to fears about rising inflation.
The minutes from the most recent BoE monetary policy meeting—which was also King's last—will be released on Wednesday. The central bank left monetary policy unchanged, but the meeting came on the heels of stronger manufacturing, service, and construction sector activity, which suggests that there could be a hint of optimism within the central bank. If one less member voted in favor of additional asset purchases, sterling will soar.
RBA Pursues Additional Easing
The Australian dollar (AUD) extended its losses against the greenback following the release of the Reserve Bank of Australia (RBA) meeting minutes. The RBA reminded the market that it is looking to ease again, and their views have not changed just because the currency weakened.
While the AUDUSD is trading below 95 cents, there may not be much downside considering that speculative short positions are at record highs. Also, if the Federal Reserve's monetary policy decision ends up driving the dollar higher against the AUD, the gains could be sharp as shorts cover.
Australian leading indicators are due for release on Tuesday evening along with New Zealand's current account report. Improvements in New Zealand trade activity in the first three months of the year should help narrow the deficit.
No economic data is expected from Canada, but the rise in oil prices should limit losses in the Canadian dollar (CAD).
Bank of Japan (BoJ) Policies Under Fire
The Japanese yen (JPY) weakened against most major currencies on Tuesday thanks to the continued recovery in US equities. Japanese data, on the other hand, was weaker than expected, with industrial production growing less than anticipated in April (0.9% month-to-month, -3.4% year-to-year).
The recent volatility in the equity and currency markets isn't going to be kind to Japan's economy. In an interview today, Japan Economic Minister Akira Amari said, "While market movements are important in themselves, the government isn't making policy to pander to markets and should have confidence that markets will follow its policies. If we are confident and improve the real economy, stock prices will naturally follow."
Amari advised the Bank of Japan (BoJ) to communicate clearly with financial markets and praised the BoJ for its plans to reach 2% inflation.
Finance Minister Taro Aso also said he thought the BoJ made the right decision about maintaining its generous QE program when the central bank last met.
Japanese trade numbers are scheduled for release Tuesday evening, and unfortunately, the rising yen is expected to drive the nation’s trade deficit higher.
By Kathy Lien of BK Asset Management