Major currencies remain becalmed as Christmas break looms, Fed in focus

Today's news headlines:

  • ‘US housing starts rise; single-family segment remains weak’. Slowing property market raises concern over the US economy as a whole. (CNBC)
  • ‘German business confidence falls to lowest level since 2016’. The fourth successive decline in sentiment highlights how the economy is deteriorating. (Financial Times)
  • ‘British government to activate full “no-deal” Brexit preparations’. Sterling was little moved by the news. (Reuters)
  • ‘Growth fears grip world markets ahead of Fed meeting’. Speech by China’s President Xi fails to lift sentiment; eyes turn to the Federal Reserve’s monetary policy decision. (Reuters)

Despite the turmoil of weaker-than-expected growth forecasts from many corners of the globe, plus the ongoing disarray that is Brexit, currency markets remain—at least for the most part—relatively unmoved. The DXY Dollar index is off its recent highs, although today’s meeting of the Federal Open Market Committee (FOMC) could provide some meaningful direction in the short-term. Markets suggest there’s around a 30% chance that the Fed won’t hike interest rates today, although just as significant will be any indication from the central bank regarding the likely path of policy tightening in the new year. Today’s news will take time to be priced into the market, but given the wide array of options on the table, US Dollar volatility may well be inevitable.

Yesterday saw further fractures emerging in the Eurozone economic growth story after German business confidence took a tumble. There’s little data due from the currency bloc during today’s session, and assuming there is no fresh escalation in budget talks among member states, overseas economic data is expected to be the key driver for the common currency in the short-term.

The UK Consumer Price Index (CPI) reading for November will be published at 9.30am GMT today and may deliver some short-term direction for the Pound. There’s no expectation of UK interest rates moving before Brexit while plummeting fuel prices should be exerting some significant downside pressure on inflation. Sterling may have been struggling to move any further lower of late, but a shortfall in this reading—meaning that the chances of a Bank of England (BoE) rate hike get pushed even further out—could see the Pound slip. Conversely, although an overshoot may have the potential to lend some support to Sterling, this is unlikely to be sustained given the ongoing Brexit uncertainty and accompanying political risk.

Yesterday’s housing data from the US proved to be something of a mixed bag. Headline numbers were slightly above expectations, but some have acknowledged that the construction of single-family dwellings is stalling, something which itself could be seen as a precursor to an economic slowdown. Today’s existing home sales data could show fatigue creeping in among consumers who are no longer trading up the property market, although any currency reaction is likely to be short-lived. The monetary policy statement plus any look ahead to 2019 will carry far more weight.

GBP/USD

Cable has been drifting slightly higher all week as the Dollar backs away from recent highs, although compared to recent bouts of volatility, gains have been little more than rounding errors. The risk for Sterling remains on the downside with the unknows of Brexit continuing to linger.

EUR/USD

Dollar weakness and optimism over the Eurozone avoiding a series of budget spats have resulted in some gains for the common currency, although these have been limited at around one cent from last Friday’s lows. US monetary policy clarity is expected to provide fresh direction.

GBP/EUR

Since the end of last week, the Pound has been trading in a tight, half-cent channel against the Euro. Given the potential for UK political uncertainty, the risk of a sharp break out is likely weighted to the downside. Positive developments over Brexit seem doubtful this side of the year-end.