FOMC's Dovish Shift in Language Weighs on USD
What’s been happening?
Pound Sterling – UK Markets
The pound sterling rose modestly against the dollar and recorded losses vs the shared currency for the third straight day as the lack of significant macroeconomic data releases from the UK and the absence of any surprising developments surrounding Brexit left the currency at the mercy of its rivals’ price action.
British Brexit Secretary Barclay said that the government was exploring alternatives to the backstop on the Irish border despite the EU’s making it clear that they are not open to renegotiation. Barclay argued that one of the options was putting a time limit on the backstop, which was also ruled out by the EU officials on numerous occasions. While speaking to reporters, Sebastian Kurz, Chancellor of Austria, reiterated that the Brexit accord would not be renegotiated. Finally, European Council President Donald Tusk reconfirmed the EU’s position in a tweet that read: “We also expect core inflation to continue grinding higher, rising above 2.5% by the early summer. As Jerome Powell stated in the press conference, they are data dependent and if the data warrants it, they will hike again.”
The data published by the Bank of England on Wednesday revealed that net lending to individuals rose to £4.8 billion on a monthly basis in December from £4.6 billion recorded in November. Furthermore, mortgage approvals came in at 63.793K to surpass the market expectation of 63.000K.
US Dollar – US Markets
The greenback gathered strength in the early NA session after the data published by the ADP showed that the private sector employment in the U.S. increased by 213,000 from December to January to beat the market expectation of 178,000 by a wide margin. However, the dovish shift in the FOMC’s monetary policy statement and Chairman Powell’s cautious remarks later in the day weighed on the buck and dragged the US Dollar Index, which gauges the USD’s value against a basket of six major currencies, to its lowest level in three weeks.
As expected, the FOMC has unanimously voted in favour of leaving the Fed funds target range unchanged at 2.25-2.5% range. In the statement, “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes,” the FOMC said to replace. Additionally, Chairman Powell noted that the case for raising rates had weakened somewhat and announced that the Fed will be finalising the balance sheet plan at coming meetings. Commenting on the U.S. - China trade conflict, Powell said a drawn-out set of trade negotiations could further weigh on the business confidence.
Euro – European Markets
With the dollar weakening on FOMC remarks and the pound sterling struggling to find demand amid the Brexit uncertainty, the euro outperformed its rivals despite disappointing macroeconomic data releases. The European Commission announced that the Consumer Confidence Index in January’s final figure improved slightly to -7.9 from -8.3. Further details of the report revealed Services Sentiment, Economic Sentiment Indicator, Industrial Confidence, and Business Climate indexes all edged down from their previous readings to confirm the deteriorating sentiment in the euro area. Meanwhile, confirming the report published by German daily Handelsblatt, the German Economy Ministry said that it lowered its 2019 GDP growth expectation to 1% from 1.8% in the previous estimate.
What’s coming up?
UK: Nationwide Housing Prices will be the only data released in the UK on Thursday.
US: The U.S. Bureau of Labor Statistics will publish its weekly initial jobless claims data and the Q4 employment cost index.
EU: Retail sales and unemployment reports from Germany and the eurozone fourth-quarter GDP growth data will be featured in the European economic docket on Thursday.