FX Weekly Report (27/04/2012): US Dollar weakened, Fed braced for action

By Gaurav Kashyap, Head of DGCX Desk at Alpari ME DMCC

Adopting a largely dovish tone, the move is seen as giving the economy an insurance policy against slower growth - on one hand Bernanke is leaving the option of additional easing on the table, but only in the event that output slows and the momentum of job growth weakens. Most of the rhetoric from the policy statement was reminiscent of their previous meetings - rates will remain exceptionally low through 2014 with the current economy growing 'moderately.'

In their future assessment of the US economy, the Fed upgraded their forecasts for 2012 - growth in the US was expected to increase to 2.4%-2.9% (up from January's projection of 2.2%-2.7%), the unemployment rate was expected to fall to 7.8%-8.0% (down from January's projection of 8.2%-8.5%) while inflation was expected to increase 1.9%-2.0% (up from 1.4%-1.8%). And for 2013, growth and inflation were expected to be weaker than January's projections.

The overall take away from the FOMC was positive for the markets, helping take US equities higher on the week and the S&P index back to those 1400 levels. The US equity segment was also boosted by a string of strong Q1 earnings, amongst some of the key announcements was Apple's net income nearly doubling from a year ago to $11.6 billion along other market heavyweights such as Ford and Amazon also beating estimates. The calendar wrapped up on a slightly negative tone, with Friday's US Q1 GDP disappointing at 2.2%, well below expectations of 2.5%.

Consumer, economic and industrial confidence drops across Euro-zone

Across the Atlantic, it was a busy week for the Euro in a political as well as economic sense. The beginning of the week saw European equities and the common currency Euro tank following some rather seismic political developments in the Euro-area. The past weekend saw Socialist Presidential hopeful François Hollande (who has been a staunch critic of France's recent austerity measures) inched out Sarkozy in the first round of voting, and thereby putting France's commitment to the European cause in question. This was followed by the collapse of the Dutch government on Monday after their ruling party resigned following the failure to agree over fiscal measures.

With most of the political fallout thus far isolated to troubled nations such as Greece, this week's developments from some of the stronger European nations had risk sentiments squarely on the back foot - and was one of the first signs of political backlash and uncertainty. To make matters worse, economic figures pointed to a slowdown in the Euro-area and Germany - German PMI data for manufacturing dropped to 46.3, Exp 49, Prev 48.4 while PMI manufacturing in the wider Euro-zone dropped to 46.0, Exp 48.1, Prev 47.7.

To cap off the poor run of numbers on the week, confidence surveys showed that consumer, economic and industrial confidence dropped across the Euro-zone. Combining the fears of the political fallout and the fragile growth prospects for the Euro-area, the Euro weakened to a 20 month low against the British Pound and dropped to 1.31 against the Greenback. The Euro did manage to pare some of its losses against the Greenback towards the end of the week as the FOMC's statements lead to broad based Dollar weakness. And finally, rating agency S&P on Friday cut Spain's rating to BBB+ with a negative outlook on the back of a deteriorating budget trajectory and higher risk to Spain's government debt.

Markets turn focus to Reserve Bank of Australia, European Central Bank

Looking at the week ahead, markets will turn their focus towards the rate decisions of the Reserve Bank of Australia (Tuesday 0430 GMT) and the European Central Bank (Thursday 1145 GMT). The European Central Bank isn't expected to change rates from 1.00%, however the RBA is expected to cut rates to 4.00% following weaker consumer prices - recent data showed YoY CPI dropped to 1.6%, Exp 2.2%, Prev 3.1%. If the cut materializes, the Australian Dollar will find weakness and could see AUDUSD test the channel between 1.0150-1.0200 where it has found good support of late.

And finally, the week will be determined by Friday's US Non-Farm Payrolls which are expected to show a gain of 200K new jobs with the overall unemployment rate to remain unchanged at 8.2%. Markets will be viewing this report with great interest - particularly after this past week's FOMC comments. March's jobs report was weaker at 120K, and snapped a three month period which had an average gain of 246K.