Euro Rise Stalls - 8.3.2011

FX markets were largely range-bound until the end of the Asia session, although the NZD recovered some lost ground against the dollar, and the CHF sold off against both the euro and the dollar as Europe walked in. EURUSD traded 1.3956-1.3989, USDJPY 82.16-82.38. The S&P 500 finished -0.83% lower, and Asian equities are broadly flat at the time of writing. Fed officials were unchanged in their assessments. Atlanta Fed President Lockhart sounded relatively neutral again as he is cautious about extending bond purchases after June, though new risks call for flexibility. Lockhart also cautioned on the US fiscal situation. Dallas Fed President Fisher remained doubtful on QE2 and will not back further support for the economy beyond it. Fisher mentioned they could curtail the program should something emerge to indicate QE2 is no longer necessary. Chicago Fed President Evans, a noted dove, does not see the need to taper asset purchases. In the near term, the dollar faces a rockier path as the pick-up in hawkish rhetoric from other G10 central banks contrasts with the cautious Fed. The dollar could particularly struggle versus the euro and sterling given hawkish ECB and BoE rhetoric.

EUR

EU Commissioner Rehn said that policymakers should look into possibly reducing interest rates on Greece and Ireland's rescue packages and also into the issue of loan maturities. Rehn also said the new bank stress tests would be more rigorous and uniform and the Euro-area summit would undertake "bold, substantial decisions."

CHF

The seasonally-adjusted unemployment rate fell to 3.4% in February, in line with consensus expectations.

GBP

Ben Broadbent has been chosen to replace Andrew Sentance on the Bank of England's MPC. His appointment is due to take effect after the May meeting. While he might not be as hawkish as Sentance, previous research suggests that he sits firmly in the hawkish camp so the loss of Sentance will not be as significant as the market initially presumed. The key swing votes lie with Tucker and Fisher. We believe sterling will remain range-bound relative to the dollar and it will be contained in the short-term in 1.55-1.65 range relative to the dollar.