Dollar declines on dovish Fed rhetoric

Dovish Fed rhetoric drives the dollar sharply lower as expectations for further rate hikes fall.

Previous Day's Market Highlights

The dollar fell steeply on Wednesday after dovish rhetoric from the Fed fuelled fears that there may be fewer interest rate rises than expected this year. Fed member Bostic suggested that the next move on rates could be either a hike or a cut, while Fed voter Rosengren stated that the Fed can wait for “greater clarity before adjusting policy” and that there could be less, or no, need for further tightening. Later in the evening, minutes from the FOMC’s December meeting continued on the dovish tone, indicating that many Fed policymakers believed they could be patient with further tightening due to muted inflationary pressures. Overall, the dollar did not react favourably to such comments, with the greenback falling around 0.6% against the pound, euro and yen. The dollar index, which tracks the dollar against a basket of peers, hit its lowest level since October.
Elsewhere, the Bank of Canada kept rates on hold at 1.75% as expected, while downwardly revising GDP forecasts due to the recent fall in oil prices. The BoC also indicated that the pace of further rate hikes will be dependent on developments in the oil market as well as the health of the domestic housing market and progress on global trade policy. While the BoC pivoted back to a more neutral stance, the loonie gained 0.4% across the board as the tone was less dovish than feared in some circles.
Tier 1 economic data was lacking once again, however eurozone labour market data for November showed the unemployment rate falling to a decade-low. Sterling remained under pressure, ahead of next Tuesday’s meaningful vote on the Brexit deal and after the government were defeated on an amendment to legislation forcing them to respond within 3 days if they lose the vote on the withdrawal agreement.
In other markets, equity markets continued to climb on renewed optimism for a thaw in trade tensions. European indices gained nearly 1% across the board with US markets adding 0.4% to record their fourth consecutive session of gains. Finally, Brent gained over 3.5% on the day on both positive trade news combined with a decline in US crude inventories. Brent crude has now entered its longest rally since 2017.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1056 1.1180 1.1025 1.39%
GBP/USD 1.2758 1.2803 1.2440 2.84%
EUR/USD 1.1540 1.1570 1.1269 2.60%
GBP/AUD 1.7786 1.8190 1.7291 4.94%
GBP/NZD 1.8818 1.9025 1.8117 4.77%
GBP/CAD 1.6895 1.7392 1.6700 3.98%

Today's Market Highlights

Today’s economic calendar sees little in the way of significant data releases therefore major pairings are likely to remain confined to their well-defined trading ranges with price action limited. The main highlight is set to be the release of minutes from the latest ECB meeting, at which the decision to bring their crisis-era QE programme to an end was made. Investors will be looking for both hints as to the timing of the first deposit rate hike, pencilled in for the second half of this year, as well as the ECB’s views on the recent softening of eurozone economic data.
Other releases of note include initial jobless claims from the US, forecast to remain steady at 225k, while Canadian building permits are expected to decline for the second consecutive month.
Central bank speakers are once again the order of the day, with the highlight set to be Fed Chair Powell speaking in Washington DC. After a relatively dovish speech on Friday, and the re-emergence of the Powell put, investors will be paying close attention to comments from the Fed chair – especially after yesterday’s dovish rhetoric. Other Fed speakers scheduled to speak include Vice Chair Clarida as well as voters Evans and Bullard.

Today's Economic Calendar

Time Currency Release Consensus Previous
12:30pm EUR ECB Monetary Policy Meeting Accounts
1:30pm USD Initial Jobless Claims 225K 231K
1:30pm CAD Building Permits (m/m) -0.5% -0.2%