EUR / USD
Tight ranges prevailed during Wednesday’s European session with inevitable caution ahead of the Federal Reserve policy decision. The dollar overall was unable to regain significant ground with the Euro trading around 1.0650 as overall risk appetite held firm with net gains for equities.
The Fed increased interest rates by 50 basis points to 4.50% from 4.00% which was in line with consensus forecasts and the vote was unanimous.
The statement reiterated that the Fed was highly attentive to inflation risks while there had been modest spending and production growth. It repeated that interest rates are expected to increase further to obtain a sufficiently restrictive policy. It did, however, add that the committee will take note of lags associated with monetary policy.
The latest forecasts of interest rates from individual committee members, the 2023 median estimate on the Fed Funds rate was increased to 5.1% from 4.6% previously with the 2024 estimate increased to 4.1% from 3.9%. Market expectations of peak rates increased slightly to 4.9% from 4.8%.
The dollar secured net gains in immediate reaction to the data with a Euro dip towards 1.0620.
Chair Powell reiterated that he anticipates that further rate increases will be necessary and that the labour market remains out of balance and very constrained despite a decline in vacancies. Powell added that the Fed still sees inflation risks skewed to the upside and again warned that it would be a mistake to ease policy too quickly.
According to Powell, the estimate of peak rates could move up or down depending on the data with the February decision based on economic and financial conditions.
Powell was confident that inflation would fall significantly next year and, although he poured cold water on the possibility of rate cuts next year, he did add that policy is getting close to being restrictive enough. There was choppy trading during Powell’s press conference with the dollar overall losing ground with the Euro around 1.0675. Risk appetite was less confident on Thursday which underpinned the dollar and the Euro settled around 1.0650. Markets expect a 50 basis-point rate hike by the ECB with forward guidance from the bank also a key element during the day with overall risk trends also likely to be a significant element.
US Treasuries dipped into Wednesday’s New York open, but there was buying on dips with the 10-year yield unable to hold above 3.50% and the dollar was held below the 135.00 level against the yen amid a soft overall dollar tone.
Treasuries lost ground in immediate reaction to the Fed policy decision with dollar gains and an immediate spike to the 136.00 area against the yen..
The dollar was unable to hold the gains with a retreat back below 135.50 as yields moved lower again following Powell’s commentary.
Chinese data was weaker than expected with the increase in industrial production held to 2.2% in the year to November from 5.0% previously with a 5.9% slide in retail sales from 0.5% previously and all releases were well below market expectations. The weaker than expected data undermined risk appetite while Japan recorded annual declines in exports and imports. The dollar retreated to lows at 135.25 before a recovery to 135.70 amid wider gains as US yields resisted a further decline.
There was a muted reaction to the UK inflation data with the data providing slight relief, but not expecting a significant impact on Bank of England policies. There was still solid Sterling buying on dips with support below 1.2350 against the dollar and a move to above 1.2400 at the European close as the dollar drifted lower.
Sterling dipped lower in an immediate reaction to the Fed policy statement, but again found support below 1.2350 and moved back above the 1.2400 area with the Euro consolidating close to 0.8600. Weaker risk appetite hampered Sterling on Thursday as it traded just below the 1.24 level against the dollar.
Consensus forecasts are for the Bank of England to increase interest rates by a further 50 basis points at the latest policy meeting, but with expectations of a split vote and relatively dovish rhetoric from the central bank. Sterling was just below 1.2400 in early Europe and there will be choppy trading conditions after the statement.
The Swiss franc posted significant gains on Wednesday with an element of position adjustment and franc buying ahead of the National Bank policy decision. Consensus forecasts are for a further rate hike of 50 basis points, but with some speculation over a more aggressive move. The Euro retreated to 0.9840 with the dollar trading below 0.9250. The dollar failed to hold an initial surge to 0.9300 following the Fed decision and settled around 0.9250 on Thursday as weaker risk appetite underpinned the Swiss currency. Forward guidance from the bank will be important for franc moves with markets looking for any commentary on a potential peak in rates.