We highlighted that yesterday was going to be the day of the dollar, unfortunately is was a bad day. The USD index dropped .74% from its highs, while EURUSD has rallied 1% from yesterday’s lows just above 1.1700 area. The USD was already slightly weaker following some slightly worse than expected CPI inflation data, the headline data was as expected but the food and energy reading only grew .1% through November. For her part Janet Yellen delivered pretty much exactly what the market had expected. In her final meeting as Fed Chair she raised interest rates by 25bps, still guiding three potential rates hikes in 2018, a slight upgrade on growth expectations and yet the greenback still found some sellers. Yellen even went as far as to say that nothing in the economy was flashing red, or even orange, however it was likely down to two dissenters on the FOMC that resulted in the USD sell off. All in all rate curves are little changed and the USD has plenty of potential to recover yesterday’s sell off.
So, where does that leave us? We’re back into yearend mode and markets will be looking at some rebalancing for the next two weeks with yearend flows likely to disrupt general directional bias. For the USD our focus will be back on the data so with that in mind we’ll be focused on US retails sales and PMI data in both services and manufacturing. A moderate improvement is expected from all and may see the USD find some late demand.
Back to Europe and we’ll be looking at central banks with both the ECB and BOE due within an hour of each other. Usually that would spell quite the afternoon but there is very little expected from the ECB, their previous meeting extended QE to September 2018, however failed to put any end date on purchases leaving the euro slightly weaker. Their current asset purchase program will end this month and we really do not expect to see anything new from Mario Draghi and co. The ECB press conference will be at 1.30pm and markets will be looking to assess Draghi’s language and perhaps pose some additional question to him about the potential end of QE. Any guidance on when QE could end will likely favour the euro but Draghi and co have continued to be cautious about such language and I would not expect that to change this week.
It’s a similar story with the BOE who hiked rates by 25bps in their last meeting. We do not expect to see any change in policy but the voting stance will be interesting. Of more interest from the UK this morning was retail sales data. Yesterday’s unemployment rate was higher than expected but slightly better wage growth meant the overall release was rather neutral, today however we saw a better print from Retail sales which was far stronger than expected, growing at 1.5% vs .2% expected. This helped drive EURGBP back below .8800, while GBPUSD has extended back above 1.3400. Elsewhere PM May suffered a defeat in the house yesterday where remainers celebrated following a vote to have more in the final passing of any agreement. PM May heads to Brussels today to face EU leaders and her position has been undermined by her own party. Not a great place to be going and I am sure we’ll be seeing some Brexit related headlines over the next 48 hours.