Market news | 11 April, 2018

Consequences of the euro-dollar volatility

Héctor Ferreiro Portfolio Manager

Market analysis from BBVA in Switzerland

The low volatility during the first quarter of 2018 appears to have come to an end. A look at the euro-dollar (EURUSD) exchange rate shows a marked change in price after the first rate rise this year, in a decision taken by the FED in its last meeting on 21 March, while awaiting the definitive consolidation of the inflation data in the US.

The first messages from Jerome Powell, chairman of the Federal Reserve since February 2018, signal optimism about the economy. Powell opts to continue the monetary policy of the previous mandate with a gradual tweaking of interest rates, or possibly even a more aggressive adjustment than expected. He has also stressed that market volatility is not a concern. In fact this type of corrections in global rates are fairly routine given the level of overheating.

The current outlook for the currency markets, with the prediction of significant activity by central banks and the stable price spread, points to possible episodes of high volatility that will determine the direction taken in coming months.

The graph below shows the divergence between current monetary policies. The blue line shows the trend of the EURUSD and the black line shows the difference between US and German bond yields. This gap between the two has tended to narrow in the past, as occurred for example in 2014.

So if the par value follows a similar trend to previous years, we will see a future narrowing between the two variables. This could occur due to a rise in the EURUSD, as in 2014, or through a decline in the difference in interest rates, which would take place over a longer period.