The USD Index pressed to one month highs yesterday ahead of today’s big day for the dollar. The trade weighted index has been steadily rising since the beginning of December in expectation of today’s FOMC meeting where Janet Yellen in her final meeting as Fed Chair, is expected to raise rates by 25 bps. Overnight however, the USD did give back some of its gains as the Republican candidate for Alabama was beaten by the Democrat nominee Doug Jones, the Republicans losing this Senate seat for the first time since the mid 70’s. Trump’s victory margin in Alabama was over 28% in the Presidential election, so to see a swing this large in such a short space of time speaks volumes for the views of the deep red state on his tenure thus far, while the candidate he openly endorsed has a somewhat questionable background as it is.
Elsewhere both the EUR and GBP were broadly weaker on the day, with EURGBP trading more or less flat as a result. It was a mixed bag for GBP, a CPI inflation reading of 3.1% means Mark Carney will have to break out the quill and get writing as he will have to explain to the Chancellor why inflation is over 1% above their target (2%). GBP rallied initially however quickly reverted to selling as markets believe this marks the peak in inflation, with the CPI figure gradually dropping back towards 2% by the end of 2018. Comments from the EU weighed on both EUR and GBP, with headlines stating EU leaders would not accept any backtracking from the UK on agreements, a slight scolding for PM May’s comments on Monday. The UK will have until March to outline the deal it wants and we cannot highlight enough that sterling remains vulnerable in this time frame.
We’ll be looking back at UK data this morning, with our focus on labour market data. The unemployment rate is expected to drop to 4.2% from 4.3% and wage growth is expected to pick up to 2.5% from 2.2%. The latter likely carries a little more weight in terms of its impact on GBP. Real wages are being squeezed by rising inflation but the .3% jump through October should help narrow the gap which will be broadly better for the UK economy and the pound as well. Eurozone employment and industrial production data headlines the European docket but to be honest will not really shift the ECB’s views too much and thus will unlikely have any lasting impact on the euro. EURGBP resistance held any moves higher below .8850 while downside has been held around the .8800 level this morning. Any move lower will be targeting .8770 area and recent six month lows just below .8700 now form firmer support.
The dollar has plenty on its plate today even before we await the details for this evenings FOMC meeting. First up will be CPI inflation readings for the US and although CPI is not the favoured metric for the Fed to measure inflation, it will still carry some weight into the meeting today. Inflation is set to pick up to 2.2% from 2% and this may well give the USD some legs into this evening meeting. 7.00pm (GMT) is the expected time for the release of the rate decision, while Yellen’s press conference will take place at 7.30pm. Yellen joined the Fed 4 years ago and was a notable dove, however through her tenure we have seen the US raise rates 4 times and today is expected to be the 5th. What matters now what the Fed suggests going forward next year, Yellen may choose to keep quiet enough on that topic, certainly her opinion of it. EURUSD ran into support just above 1.1700 as suggested in yesterday’s commentary, lows around 1.1716 resulted in a moderate bounce. That being said the euro looks heavy enough again todays and a break sub 1.1700 should favour progress lower back towards recent lows at 1.1550 area.