Fed's Dovish Shift Drags USD Lower
What’s been happening?
Pound Sterling – UK Markets
Prime Minister Theresa May suffered its second defeat in two days on her Brexit legislation as lawmakers voted in favour of the amendment to the motion, giving the government three days to announce the next steps if May’s deal were to get voted down on January 15. The British pound came under pressure and weakened against the shared currency following this development and struggled to take advantage of the broad-based dollar weakness.
Commenting on the UK’s proposals on the Irish backstop, Northern Irish Democratic Unionist Party (DUP) member Sammy Wilson said that they were meaningless. “No EU assurances can change the legalities of the Brexit deal,” Wilson added. Meanwhile, The Guardian reported that the Labour Party’s leader, Jeremy Corbyn, would table a motion of no-confidence immediately if Prime Minister Theresa May were to lose the Brexit vote next week. Later in the day, while responding to questions during the first PMQs of 2019, PM May announced that the Parliament would have a vote on implementing backstop and explained that lawmakers would know of EU assurances on the backstop before the vote.
US Dollar – US Markets
After staying calm during the first half of the day, the US Dollar Index, which gauges the dollar’s value against a basket of six major currencies, lost its traction and dropped to its lowest level since mid-October amid dovish comments from Fed officials and the cautious tone that the Fed adopted in its December meeting minutes.
While speaking at an event in Tennessee, Atlanta Fed President Raphael Bostic, who is a non-voter, said that he was open to a rate cut if the downside risks were to materialize. “The Fed needs to strongly signal that it’s not locked into a trajectory,” Bostic added. Moreover, Boston Fed President Eric Rosengren argued that the Fed could wait for greater clarity before adjusting its policy.
Confirming the dovish shift in Fed officials’ tone, the FOMC in its December meeting minutes noted that participants expressed the view that the Fed could afford to be patient about further rate hikes. “Recent developments, including the volatility in financial markets and the increased concerns about global growth, made the appropriate extent and timing of future policy firming less clear than earlier,” the publication read. “They (participants) noted monetary policy was not on a preset course; neither the pace nor the ultimate endpoint of future rate increases was known,” the FOMC added. Regarding the impact of Trump administration’s trade policy, the FOMC noted that the nonfinancial firms' earnings reports suggested that tariffs were a salient concern in the changed outlook for corporate earnings.
Euro – European Markets
With the greenback losing interest and the pound sterling struggling to gather strength due to the political concerns in the UK, the shared currency outperformed its rivals on Wednesday despite mixed macroeconomic data releases.
The data published by Destatis on Wednesday showed that the trade surplus in Germany rose to €19 billion in November from €17.9 billion in October. However, exports in the same period contracted by 0.4% while imports fell by 1.6% to help the trade surplus widen. Other data from the euro area revealed that the unemployment rate in the eurozone ticked down to 7.9% şn November from 8% in October and beat the analysts’ estimate of 8.1%.
What’s coming up?
UK: The BoE will publish its Credit Conditions survey on Thursday and the Parliament will start the Brexit debate ahead of next week’s vote.
US: Weekly jobless claims will be the only data from the U.S. on Thursday. FOMC Chairman Powell and members Bullard, Evans, and Clarida will be delivering speeches in the second half of the day.
EU: The European Central Bank will release the minutes of its December meeting on Thursday. Markets will be looking for clues on the monetary policy outlook in light of the latest disappointing macroeconomic data readings from the area.