Currency market hitting the pause button

The dollar declines as the Fed strike a dovish tone, emphasising patience going forward, as attention turns toward today’s eurozone growth data.

Previous Day's Market Highlights

The Federal Reserve gave their clearest indication yet that they will hit the pause button on the current tightening cycle as interest rates were kept on hold at yesterday’s meeting. While the rate decision was as expected, the FOMC emphasised that their stance going forward will be patient, data dependent and removed the reference to a necessity for “further gradual hikes” from their monetary policy statement – a clear sign that rates are unlikely to increase any time soon and that the Fed are in ‘wait-and-see’ mode. At his post-meeting press conference, Fed Chair Powell added that the case for further hikes “has weakened” while also confirming that current interest rates are in the range of neutral rate estimates.
Overall, markets saw the statement as more dovish than forecast with the dollar falling as much as 0.7% against a basket of peers in the aftermath of the decision. The greenback touched €1.15, its highest level since mid-January, while cable rallied above $1.31 as market participants readjusted their positioning to adjust to the Fed stepping back from its previously hawkish stance.

Away from the Fed, European data releases were mixed with net individual lending figures in the UK beating forecasts while Eurozone economic sentiment figures were below market expectations, falling to a 2-year low. The latter is likely to further add to the single currency bloc’s woes and place greater emphasis on today’s GDP release. Despite the poor data, the euro once again traded largely unchanged, likely underpinned after German CPI figures showed inflation at 1.7% on a year-on-year basis, in line with forecasts. Meanwhile, the pound was unable to regain much ground after yesterday’s losses amid a lack of significant news flow while the Swiss franc lost 0.5% after the monthly economic barometer fell for a fourth consecutive month to its lowest level since 2015.
In contrast to the Swissie, commodity currencies recorded strong gains with both the Canadian and Australian dollars adding 0.5%. The loonie gained due to an increase in the oil price while the Aussie dollar benefited from both positive CPI inflation overnight as well as risk-on sentiment taking hold of the market.
In other asset classes, European equity markets gained with all major bourses, barring Germany and Spain, adding over 0.75% with mining stocks driving the market forward. Across the pond, markets in the US made strong gains after the Fed meeting, with the benchmark S&P 500 adding more than 1.5%. Finally, as mentioned, both Brent and WTI gained over 2% as market participants continued to assess the impact of US sanctions on Venezuela.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1428 1.1604 1.1035 4.90%
GBP/USD 1.3140 1.3281 1.2440 5.89%
EUR/USD 1.1498 1.1570 1.1280 2.51%
GBP/AUD 1.8075 1.8522 1.7613 4.91%
GBP/NZD 1.9007 1.9426 1.8603 4.24%
GBP/CAD 1.7239 1.7498 1.6756 4.24%

Today's Market Highlights

After last night’s Federal Reserve meeting, attention turns to the eurozone this morning and the release of GDP growth figures for the final quarter of last year. Market participants are expecting growth of just 1.2% on a year-on-year basis, down almost half of one percent from Q3, to what would be the slowest GDP growth since 2015. Such an outcome is likely to further fuel concerns of an economic slowdown across the bloc following recent sharp falls in German industrial production as well as a plethora of other country-specific indicators. Also scheduled from the eurozone is the latest set of unemployment figures, which are expected to have remained steady at 7.9% in December.
Elsewhere, monthly GDP figures from Canada are expected to show a contraction of 0.1% while initial jobless claims from the US will be examined closely after falling below 200k for the first time since 1969 last week and ahead of tomorrow’s official labour market report. For the pound, Brexit headlines are once again the order of the day with no significant economic data scheduled for release.
Finally, a few central bank speakers may ignite market volatility including the ECB’s Mersch, BoC’s Wilkins and the German central bank president Weidmann. As usual, any hawkish comments are likely to strengthen the respective currencies.

Today's Economic Calendar

Time Currency Release Consensus Previous
10:00am EUR GDP (y/y) 1.2% 1.6%
10:00am EUR Unemployment Rate 7.9% 7.9%
1:30pm USD Initial Jobless Claims 215k 199k
1:30pm CAD GDP (m/m) -0.1% 0.3%