The US Dollar Stays Flat as FOMC Offers Nothing New
What’s been happening?
Pound Sterling – UK Markets
The British pound advanced to its highest level vs the dollar in three weeks but failed to hold on to its gains in the second half of the day as the highly anticipated May-Junkcer meeting didn’t produce any headlines suggesting that sides are closer to reaching a Brexit deal. “The two leaders agreed that talks had been constructive,” the European Commission said in a joint statement on behalf of European Commission President Juncker and British Prime Minister Theresa May. “They will review progress again in the coming days, seized of the tight time scale and the historic significance of setting the EU and the UK on a path to a deep and unique future partnership.”
Three Conservative MPs, Heidi Allen, Anna Soubry and Sarah Wollaston, on Wednesday, announced their resignation and stated that they joined the Independent Group. Commenting on this development, British Prime Minister Theresa May said that Brexit was never going to be easy and noted that it had been a source of disagreement. In the PMQs. Ahead of her meeting with EU Commission President Juncker, May repeated that she will try to secure legally-binding changes to the Irish backstop.
Meanwhile, the Confederation of British Industry reported that manufacturing orders rose 6% in February following January’s 1% decline. Assessing the data, “UK manufacturers continue to be supported by the lower level of sterling, although weaker global economic momentum means less support for export orders from that front. But the continued threat of a no-deal Brexit poses the biggest risk to the outlook for UK manufacturers. For more detail, see our December economic forecast,” the CBI said in its publication.
US Dollar – US Markets
The greenback continued to weaken against its major rivals and the US Dollar Index slumped to its lowest level since February 6. However, with the FOMC sounding not as dovish as anticipated in the minutes of its January 29-30 meeting, the index recovered its losses and closed the day virtually unchanged.
The FOMC in its publication noted that several participants argued further rate hikes would be appropriate in 2019 if the economy were to evolve as expected. "Almost all participants thought it would be desirable to announce plan to stop reducing balance sheet later this year," the FOMC said on the balance sheet reduction strategy. "Many policymakers suggested that some further very gradual decline in average level of reserves could be appropriate."
Meanwhile, in an interview with CNN, Federal Reserve's Vice Chairman Richard Clarida said that it wasn’t clear how much of an economic growth slowdown was being observed in the U.S. and stated that the Fed could afford to be patient and wait for the data.
Euro – European Markets
The shared currency closed the day flat vs both the dollar and the pound sterling on Wednesday. The only data from the euro area showed that the European Commission’s Consumer Confidence Index in February (preliminary) improved slightly to -7.4 from -7.9 in January and came in better than the market expectation of -7.8.
In a keynote speech at the 11th Frankfurt Main Financial Centre Breakfast this Wednesday, European Central Bank chief economist Praet said that the normalisation of central bank instruments was not akin to policy tightening and announced that the ECB was expected to announce a decision on TLTROs in the next meeting. In the meantime, the International Monetary Fund (IMF) Managing Director Christine Lagarde told German newspaper Die Zeit that the IMF was likely to downgrade the German growth outlook. “Central banks typically lower interest rates by five percentage points to shore up the economy in the event of a looming recession, but that's not the case if the interest rate is one, two, or, as in the case of the Eurozone, zero. That means governments have to do more." Lagarde explained.
What’s coming up?
UK: Public sector net borrowing will be the only data featured in the UK economic docket on Thursday.
US: Weekly jobless claims, durable goods orders, existing home sales, and Markit Manufacturing/Services PMI data will be released in the U.S.
EU: The IHS Markit will publish the Manufacturing and Services PMI reports for the euro area and Germany on Thursday. Earlier in the day, the Consumer Price Index (CPI), which is expected to come in at -0.8% in January, will also be watched closely by market participants.