Forex Report: Dollar rallies on Yellen news and pound slides on weak industrial data

BRIEF: Write a 500-word report on moves in the global forex market in recent days and the factors that may have influenced those moves. Also include a reference to factors likely to affect the forex market in the next few days. Focus on major currencies. Time: 2.5 hours including research

The dollar index strengthened on the back of increased risk appetite as news broke that the President has backed Janet Yellen to lead the Federal Reserve, yet the greenback is still at an eight month low due to the ongoing budget crisis.

Yellen, currently second in charge at the U.S. central bank, will take over from Ben Bernanke on January 31^st 2014. She is expected to maintain the accommodative monetary stance adopted by her predecessor. The former frontrunner Larry Summers, perceived to favour early tapering of quantitative easing, ruled himself out of contention last month.

In Wednesday’s trading, the dollar rose 0.4 per cent against the yen but remained flat against the euro at $1.3574.

The dollar’s safe-haven status has been in question as a result of the U.S.’s fiscal impasse. Investors looking to de-risk are currently backing the yen.

“It might be counterintuitive that the dollar rose on news that a dove is likely to be the next head of the Fed, but the news itself removed some of the uncertainty, and therefore contributed to risk-on sentiment,” said Ayako Sera, market economist at Sumitomo Mitsui Trust Bank, to Reuters.

In spite of the aggressive monetary easing employed by Japan’s Abenomics programme, the U.S.’s uncertain outlook has seen the yen appreciate against the dollar in past months. Nonetheless, the minor 1.56 per cent appreciation over the previous three months compares with a 19.7 percent depreciation over the previous 12 months.

Meanwhile, sterling fell to a two week low after industrial production figures fell well below analyst estimates. Earlier in the week, the IMF (International Monetary Fund) doubled the UK’s 2013 growth forecasts. However, today’s ONS (Office for National Statistics) figures show a decline in manufacturers’ output of 1.2 per cent versus an anticipated 0.4 per cent increase. The pound is down against all major currencies including a -0.9 per cent decline against the dollar.

Looking ahead, markets will be awaiting the release of FOMC (Federal Open Market Committee) minutes from last month’s meeting. It was widely anticipated that the Fed would announce tapering of its bond purchasing operations, which currently stands at $85bn a month. When this failed to materialize, markets reacted frantically with the Dow rising 147 points on the day. Numerous factors could explain Bernanke’s decision- principal among these is the government shutdown- but traders will be anxious to find out exactly what influenced the committee’s decision. The minutes will be published today, 2pm Eastern time.

Overall, currency movements are set to remain constrained amidst protracted U.S. negotiations.

“We are definitely waiting for an end to the US shutdown. I think Thursday 17th is ‘d-day’ where they’ve got to come up with a solution before they default on the debt but markets are definitely in wait and see mode. Most clients are holding only very light positions at the moment,” said David Massey, an RBS forex analyst.