FED policy , European Parlamient elections and EUR/USD expectations !

·         Conflicting views of Fed policy:  Fed policy is a focus this week, as I wrote yesterday, but just because people are focusing on it doesn’t mean it’s becoming any clearer. The Wall Street Journal suggested that the FOMC minutes to be released on Wednesday may have a hawkish tone, but another press report that the markets apparently took more seriously suggested the minutes would have a softer tone. Speaking in Texas, San Francisco Fed President Williams noted that inflation has been persistently below the Fed’s long-term target and said he was concerned that the recovery in the housing market had “stalled”. But he quickly contradicted those dovish comments by saying that the Fed would probably start raising rates over the next year or so as part of the process of “normalization” (which the market already expects, but it’s another thing to have it officially confirmed.) Investors started to worry that comments like this would be part of Wednesday’s FOMC minutes and 10-year yields moved up 2 bps. Fed Funds futures moved off their lows yet still ended the day with implied rates at the long end down 5.5 bps.

·         There was a similar mix of views with regards to ECB policy. ECB Board member Mersch said “the probability that the Governing Council will act already at its next meeting in June has risen significantly”, but Governing Council member Nowotny said that negative interest rates “must still be thoroughly discussed”.

·         The fact that EUR/USD was unable to make new lows against this mix of views made investors nervous and there was some short-covering as a result.

      I think the market is starting to pay more attention to this weekend’s European Parliament elections and this is likely to be negative for the euro.