Not Dovish Enough

The dollar holds steady amid a Wall St sell off after the Fed hike rates and indicate further tightening to come.

Previous Day's Market Highlights

The main market highlight was the Federal Reserve meeting, where the FOMC unanimously voted for an interest rate increase of 25bps to a target range between 2.25% and 2.5%. However, the Fed’s statement changed to mention “some further gradual hikes” meaning that the Fed is likely to become increasingly data dependant in 2019 rather than remaining on ‘autopilot’ with a hike every quarter. In addition, the dot plot was revised to just 2 rate hikes next year, rather than the previously expected 3 thus meaning the meeting was interpreted as being towards the dovish end of the spectrum. 
 
After the rate decision, the dollar traded largely flat as the outcome was expected by most market participants. Despite this, US equity markets soured on the news with the S&P 500, losing more than 1% and falling to its lowest level since September 2017 as investors reacted negatively to the prospect of further monetary policy tightening. This was the sharpest equity market response to a Fed rate decision since 1994. 
 
Elsewhere, the euro strengthened by more than 0.4% after an agreement was struck between Italy and the European Commission over its budget proposals for the coming years. The single currency also strengthened against the pound as fears over a no-deal Brexit continued to take hold over the market.
 
On the data front, inflation figures from the UK were released in line with forecasts showing an increase of 2.3% on a year-over-year basis while Canadian inflation data missed forecasts to the downside with a year-on-year increase of 1.7%. This release has all but ruled out the chances of a January rate hike from the Bank of Canada.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1082 1.1349 1.1004 3.04%
GBP/USD 1.2650 1.2927 1.2491 3.37%
EUR/USD 1.1416 1.1472 1.1267 1.79%
GBP/AUD 1.7793 1.7818 1.7208 3.42%
GBP/NZD 1.8767 1.8985 1.8183 4.22%
GBP/CAD 1.7051 1.7175 1.6722 2.64%

Today's Market Highlights

Overnight, the kiwi dollar has lost more than 1% after GDP figures showed a slower pace of expansion than expected, with quarter-on-quarter growth of only 0.3%. In addition, figures from Australia indicated a slight uptick in the unemployment rate however the economy added more than double the expected number of jobs last month. Despite this, the Aussie dollar was broadly unchanged. 

The economic calendar is much quieter today with the main highlights being two central bank meetings, that of the Bank of Japan and the Bank of England. Early this morning the BoJ announced that interest rates would remain on hold at -0.1% while making no changes to their monetary policy statement. Both the yen and Nikkei traded flat, though the latter was nearing a 20-month low having officially entered a bear market. 
 
Later today, the Bank of England are also forecast to leave rates unchanged at their present level of 0.75%. Any action from the BoE is extremely unlikely until the Brexit related uncertainty has dissipated, however potential comments surrounding a disorderly, no-deal exit would provide markets with food for thought. 
 
The calendar is otherwise quiet, with markets likely to begin winding down into the holiday season. Highlights elsewhere include  the latest set of UK retail sales figures as well as the Philadelphia Fed manufacturing index. The former is likely to be watched as an indicator of the health of the struggling UK retail sector while the latter will attract focus as a barometer of the health of the US manufacturing sector.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:30am GBP Retail Sales (m/m) 0.3% -0.5%
12:00am GBP Bank of England Rate Decision 0.75% 0.75%
1:30pm USD Initial Jobless Claims 216k 206k
1:30pm USD Philadelphia Fed Manufacturing Index 15.0 12.9