The currency markets are being driven by statements from central bank officials in major economies, showing just how important remarks by central bank policymakers are in a world where actions often speak louder than words.
The British pound, the Australian dollar, the euro, and the US dollar
have all been driven by remarks from their respective central bankers in what has otherwise been a dull trading session on Wednesday given the relatively light economic calendar.
In fact, their words already made themselves felt in markets at the start of the week but particularly after the Federal Reserve's (Fed) monetary policy meeting last week, which appears to have sparked the rhetoric.
Central banks officials have mostly become more optimistic or 'hawkish' as they try to anticipate a cycle of interest rate hikes. Overall, rate hike expectations are being pulled forward except at the European Central Bank, where officials are not making it any easier for investors to predict the next policy move.
BOE Weale talks up the pound
The GBP/USD has been trading in a lull until Bank of England (BOE) member Martin Weale expressed optimism over the economy, particularly noting that wage growth is starting to pick up and investment is playing a greater role in the economy while making it clear that he is starting to think about monetary tightening.
"Obviously, as the economy recovers, the interest rate isn't going to stay at half a per cent indefinitely," Weale said, provoking a jump in the GBP/USD to above the 1.6550 mark and away from the psychological level of 1.65. Simultaneously, the pound gained against the euro, which was talked down by its own authorities. The EUR/GBP moved down to the 0.8325 mark and away from the 0.8350-0.84 range.
The remarks by Weale were in the same vein as other statements made over the last week to the effect that there is less slack in the economy than expected.
RBA Stevens shrugs aside 'overvalued' currency
A similar story took place overnight in Australia where Reserve Bank of Australia (RBA) Governor Glenn Stevens reaffirmed that interest rates would remain stable for some time and suggesting that the current easing cycle was over. More importantly, however, he expressed concern over rising prices, particularly in the property market.
Aside from the future threat of inflation, Stevens was upbeat about economic growth, in part thanks to low bank rates. He also appeared less aggressive about guiding the Australian dollar lower compared to past occasions but noted that it would be surprising if the AUD/USD didnt fall in terms of trade. Stevens´ remarks suggested an increased comfort level with the current exchange rate
and allowed the currency pair to extend the current short-term bullish trend to trade above 0.9200.
Predominantly dovish but mixed ECB remarks
Meanwhile, policymakers´ rhetoric in the Old Continent is not unequivocal but rather predominantly dovish. For instance, one analyst cited by The Wall Street Journal was expecting the ECB to eventually take more action, but added that predicting the timing is as difficult as ever.
Notably, ECB hawk 'par excellence', Bundesbank President Jens Weidmann, displayed a new willingness to consider additional monetary stimulus, showing a preference for a negative deposit rate over quantitative easing but not ruling out the latter.
Also on the dovish front, ECB Governing Council member Erkki Liikanen said that a negative deposit rate was no longer a "controversial issue" and remained an option to guard against excessively low inflation. He also said QE was not a legal problem.
In that same vein, ECB member Josef Makush said he wouldn't oppose QE if it were needed.
It has become clear that ECB officials are discussing the possibility of new measures but ECB President Mario Draghi has remained true to a stance that downplays the risk of deflation, standing "ready to take additional monetary policy measures" but expecting the impact of the current accommodative policy to increase.
Nonetheless, the dovish bias was enough to keep the euro from rising. The EUR/USD finally revealed itself more susceptible to the dovish remarks that were to be heard on Wednesday by falling below $1.38.
Finally, members from the Federal Reserve had broadly similar views in line with their previous remarks, allowing the US dollar to reverse part of last week's rally.
Overall, their most recent remarks do not detract from the more 'hawkish' impression offered by Fed Chair Janet Yellen albeit while reaffirming that she did not signal a change in policy.
The prevailing view was perhaps best summed up by Atlanta Fed President Dennis Lockhart on Tuesday: "I think it's a question of conditions that actually are achieved over the next two or three years. I think when Chair Yellen, in a sort of offhand way said maybe six months or longer, that is really a minimum, not a maximum."
In conclusion, central bank rhetoric has not been cheap; it has been powerful enough to drive moves in currency markets. However, it may take concrete actions to clearly define future trends.