US Dollar strengthens following Fed's interest rate decision
18/Dec/2015 • Currency Updates•
The Federal Reserve’s first rate lift-off in nine years proceeded very much as expected on Wednesday night. The slightly hawkish “dot plot” suggested that we could see as many as four further rate hikes next year. This ensured that the US Dollar was well supported yesterday.
The Dollar rallied to a ten-day high against the Euro and a fresh eight-month high versus the Pound, despite some relatively encouraging retail sales figures in the UK that bode well for fourth quarter economic growth. This sell-off, however, proved to be far from dramatic, given the outcome was so strongly anticipated.
In 2016 attention in the US will turn to the next Fed hike. While the market is currently pricing this in at either the April or June meeting, we see a good chance that the next 25 basis point hike could take place as early as the first quarter, at the March Federal Open Market Committee meeting. This, of course, remains data-dependent.
In the emerging market universe, the Argentine Peso plummeted by nearly 30% against the US Dollar after the country’s newly appointed government lifted controls on the currency and floated the Peso as part of a series of new free market reforms aimed at stimulating the beleaguered Argentinian economy.
Major currencies in detail
Sterling received support on Thursday from some bumper retail sales, although it still finished 0.5% lower against the Greenback.
Retail sales surged above expectations in November, boosted by Black Friday deals in the run-up to the Christmas period. Overall, sales increased by 1.7% in the month, much higher than the modest 0.6% expansion that was expected, with volumes a massive 5% higher than a year previous. Even if December proves to be an underwhelming month of sales, 2015 looks set to be a good year, with sales volumes rising at their fastest pace since 2004.
Thursday’s strong level of consumer spending suggests that we could see a moderate improvement in final quarter economic growth, set to be released in the New Year.
No economic releases in the UK today should lead to a quiet end to the week.
The Fed’s decision on Wednesday continued to weigh on the single currency yesterday, which ended 0.4% lower against the Greenback.
The Euro was driven further lower by some underwhelming economic indicator data released on Thursday. The monthly confidence surveys from IFO all disappointed in Germany. The business climate index dipped to 108.7 from 109, albeit it’s still higher than the overall 2015 average.
Elsewhere, construction output remained sluggish, increasing by just 0.5% in October from a month previous. Production was up by 1.1% on a year previous but down on the 1.6% recorded in September.
Friday looks set to be a relatively muted day in the Eurozone with no major data releases. The Euro remains vulnerable from renewed expectation on policy divergence with the US following the Fed hike. Focus in the Eurozone will also turn to politics, with the Spanish general election set to take place on Sunday. Opinion polls suggest that there will unlikely be a clear result among the four main parties vying for a place in government.
The US Dollar was well supported throughout the London session, following the Fed hike on Wednesday, with the US Dollar index ending 0.6% higher.
Investors yesterday focused on the FOMC’s “dot plot”, which represents where each member of the committee expects rates to be at the end of each year. This suggests that we could see four hikes from the Fed next year, although the market still only expects two.
There was some mixed data released, although unsurprisingly this was all overlooked as far as USD was concerned. Jobless claims impressed again, moderating downwards to 271,000. The Philly Fed index disappointed, printing negative for the third month since August at -5.9.
There’s little in the way of major announcements to look out for to end the week. Services sector growth from Markit and a speech from Fed member Lacker will be very much second-tier announcements.
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