When Doves Cry

A more dovish than expected Fed sends the dollar falling while sterling struggles as Brexit-related headwinds intensify ahead of today's EU summit.

Previous Day's Market Highlights

The dollar declined on Wednesday as markets were surprised by a more dovish than expected conclusion to the Federal Reserve’s latest policy meeting. Despite leaving interest rates unchanged, the Fed signified that there would be no further hikes this year, and just one further 25bps hike in 2020, moving the Fed’s Dot Plot roughly in line with market pricing for the remainder of this year. However, further dovish surprises were still to come, with the Fed downwardly revising GDP forecasts for the next 2 years and, in a somewhat unexpected move, announced the end to their balance sheet run-off (the reversal of crisis-era quantitative easing). The Fed plan to slow the pace of the run-off from May, bringing the process to an end in September, a full quarter earlier than had been expected. Relatively positive comments from Fed Chair Powell, emphasising that the US economy remains in a good place did little to help the dollar, which lost more than 0.5% against a basket of peers over the day. Against the euro, the dollar also declined, with the pairing breaking through the $1.14 mark for the first time since February. 
Elsewhere, the UK’s divorce from the EU continues to rumble on, with markets growing increasingly jittery over the possibility of only a short delay to Brexit or an ‘accidental’ no-deal exit. The UK has formally requested an extension until the end of June, though the EU have indicated they would desire an extension to expire by 22nd May or for the process to carry on until the end of the year. This disagreement, along with the continued stalemate in Parliament left investors concerned and resulted in sterling losing more than 1% across the board over the day, with above-forecast inflation figures failing to help the pound find support . In contrast, the New Zealand dollar performed well, gainings almost 0.5%, after GDP growth for the final quarter of 2018 was in line with expectations. The economy grew at 0.6% on a quarter-on-quarter basis, double the rate in Q3. 
Overnight, the Australian dollar has gained around 0.2% after the release of labour market data. Despite below forecast employment change, a drop in the unemployment rate, to its lowest level in almost 8 years has underpinned the Aussie. Furthermore, the probability of an RBA rate cut this year has modestly declined in reaction to the positive data. 
In other markets, equity markets declined, with financial stocks leading the losses. The pan-European Stoxx 600 fell 0.8%, while the US benchmark S&P 500 lost 0.3%. Finally, oil prices rallied aftergreater than expected drawdowns from US storage, both Brent and WTI gained over 1%, with the latter reaching $60bbl for the first time since November last year.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1550 1.1803 1.1456 2.94%
GBP/USD 1.3180 1.3381 1.2939 3.30%
EUR/USD 1.1415 1.1448 1.1176 2.38%
GBP/AUD 1.8444 1.8851 1.8096 4.01%
GBP/NZD 1.9044 1.9542 1.8946 3.05%
GBP/CAD 1.7535 1.7795 1.7111 3.84%

Today's Market Highlights

The pound is likely to take centre stage today, with 3 key events on the horizon. Firstly, the Prime Minister will be heading to Brussels for the EU Summit in an attempt to agree an extension to the Article 50 period and delay the UK’s exit from the bloc. The EU have indicated that it may not be possible to sign off on a delay today, hence the uncertainty surrounding Brexit appears set to continue, creating a further headwind for the pound. Secondly, the Bank of England will announce their latest monetary policy decision at noon, with no change to rates expected. Of more interest will be any comments relating to recent positive labour market data, ongoing Brexit-related uncertainties as well as the continued emphasis on “gradual and limited” rate hikes being required in the event of an ‘orderly’ Brexit. Finally, retail sales numbers for February are expected to show a decline of 0.4% on a month-on-month basis, though may fade into the background amid the busy day of events. 
Meanwhile, in Europe, focus will likely fall with the Swiss National Bank’s latest monetary policy decision - their first of the year. No change to interest rates is expected, with the SNB unlikely to alter rates until their counterparts at the ECB have done so first. Therefore, focus will fall largely with comments about the value of the franc, along with a fresh set of economic forecasts. For the single currency, little in the way of tier 1 data is released, though markets will keep one eye on this afternoon’s preliminary consumer confidence figures. 
Elsewhere, the afternoon session is set to be dominated by North American labour market releases. Weekly jobless claims are due from the US alongside the monthly ADP employment change numbers from Canada. The latter should be a useful indicator of the health of the Canadian economy after the BoC’s neutral shift, though the figures can vary wildly from official labour market data. Finally, the overnight release of CPI inflation figures from Japan may spark some volatility in the yen. Both headline and core CPI are expected at 0.3% on a year-on-year basis. Barring the aforementioned central bank meetings, no speeches are due today.

Today's Economic Calendar

Time Currency Release Consensus Previous
08:30 CHF SNB Rate Decision -0.75% -0.75%
08:30 CHF SNB Monetary Policy Assessment
09:30 GBP Retail Sales (m/m) -0.4% 1.0%
12:00 GBP Bank of England Rate Decision 0.75% 0.75%
12:30 USD Initial Jobless Claims 225k 229k
23:30 JPY National Core CPI (y/y) 0.3% 0.4%