Fed’s forward guidance lifts the US Dollar

Today's news headlines:

  • ‘Fed hikes rate, lowers 2019 projection to 2 increases’. Further gradual policy tightening remains necessary. (CNBC)
  • ‘UK inflation rate cools to 20-month low’. Oil prices drive change, but rising wages improve living standards. (Financial Times)
  • ‘Eurozone Construction Output falls in October’. Print shows 1.6% decline vs September’s 2.1% increase. (Alliance News)

It seemed inevitable that yesterday’s economic agenda was always going to be dominated by the final Federal Reserve call over monetary policy for the year. A wide range of options were on the table, so the decision to hike interest rates for the fourth time in 2018, plus provide guidance that two further rate hikes would be necessary in 2019, was seen as sitting at the hawkish end of the spectrum. Recent history suggests that the Fed has a tendency to overstate the pace of rate hikes when giving forward guidance, and the market may be pricing this in. Yesterday’s news proved sufficient enough to stem the Dollar’s general trend lower, although gains seem to be evaporating already.

After slumping quite sharply off the back of the Federal Reserve’s note yesterday, the Euro is already staging a rebound against the US Dollar. Better-than-expected Dutch employment data is the latest metric to lend support to the common currency, although it seems factors such as yesterday’s apparent budget accord between Brussels and Rome carry the most meaningful support. Even yesterday’s disappointing Eurozone Construction Output print has been largely glossed over. This indicates confidence in the fact the Eurozone economy can continue its recovery, leaving the Euro looking rather cheap to some at these levels.

There are two key releases from the UK during the coming hours. November Retail Sales are tipped to show a significant slowdown at 9.30am GMT once petrol is excluded, underlining the numbers markets have seen emerging from the high street in recent weeks. Add this to the ongoing concern over Brexit, and downside pressures could continue to build against Sterling.

Midday GMT sees the Bank of England (BoE) make its final rate call for the year. There is no expectation of any change here, and it seems realistic to believe Mark Carney will stick to the plan of not shifting monetary policy until after the Brexit process has taken place. However, it’s the forward guidance that could prove critical. The Bank’s tone over Brexit has been incredibly pessimistic, something which has drawn a raft of criticism from many different corners. Assuming there’s no change in the rhetoric again, this seems unlikely to provide any support for Sterling.

GBP/USD

Yesterday’s Fed-inspired gains are already looking to be short-lived, although Sterling stands at risk this morning. Either a shortfall in the already depressed Retail Sales reading or another layer of pessimism from the Bank of England over Brexit could see the recent rally reversed.

EUR/USD

The Euro has regained around half of yesterday’s Fed-inspired losses, resuming the upward trend that has been in play for the last week. With no fresh data due from the Eurozone and only limited readings expected from the US today, further gains may be seen.

GBP/EUR

Brexit woes as both the UK and EU stepped up plans for no-deal being struck eroded sentiment yesterday, although losses were limited to less than a cent. There’s been something of a partial recovery, although caution prevails, and disappointing UK numbers today could leave the downside exposed again.