Weekly: FX – Expectations on monetary policy dominate currency markets

by: Georgette Boele , Roy Teo

EUR/USD continues to track movements in the 2-yr yield spread between Germany and the US. The better-than-expected US data releases at the start of the week pushed US yields higher and this resulted in support for the dollar versus the EUR. On Thursday, Mr. Draghi’s comments resulted in intraday volatility. Initially he was able to talk down German yields and this pushed EUR/USD lower. But halfway through the press conference markets started to doubt Mr. Draghi’s determination to take strong action to lower interest rate expectations. This resulted in a rebound in German yields and at the end of the Q&A session German 2-Y yields were at the same level as before the ECB rate decision, but the EUR/USD was still lower reflecting stronger initial jobless claims data. Later in the day, the stronger than expected US ISM non-manufacturing pushed EUR/USD to the low 1.31, but on Friday weaker-than-expected US employment report resulted in the USD partly giving back gains. We remain of the view that US economic outperformance will drive the dollar higher against the euro.

Weekly FX 9 September 2013 – Expectations on monetary policy dominate currency markets