The Week That Was…
A pivotal week for Forex markets comes to an end as many traders wind down the year now with the holidays ahead. The unmissable theme dominating markets this week was the US December FOMC which, as expected, saw the Fed lifting rates for the first time in nearly a decade, ending a seven year period of rates almost at zero percent. The move was well signalled by the Fed and widely anticipated, indeed CME group were pricing an 83% probability of lift-off ahead of the meeting. With the resulting 25bps increase taken as a given by markets, all focus was on the accompanying outlook and projected rate-path guidance for increases following the initial lift-off which actually was not as Dovish as some were expecting; the Fed signalled a further four rate increases to come next year.
Alongside the higher than expected projected rate-path the Fed also raised it’s growth outlook for 2016 but at the same time lowered in its inflation forecast. When questioned about inflation in the press conference which followed Fed chair Yellen stated that the Fed’s 2% inflation target will not have to be met before they raise rates again and reiterated the Fed’s stance that recent softness in inflation was due to transitory factors. Regarding global risk factors the Fed noted that risks from these elements persist but they have lessened since the summer and the domestic economy has shown strength. Indeed, the Fed choosing to raise rates at this point was a sign of their confidence in the growing strength of the economy.
Aside from some initial turbulence as the release unfolded, the US Dollar was firmer in response to the news and has continued to appreciate against most of its major trading counterparts in the days since. Equity markets were also stronger in reaction to the release as markets embraced the lift-off as a sign of the Fed’s confidence in the economy, which spurred a pick-up in risk appetite. Despite a smooth start to the Fed’s new tightening cycle, the mood has since soured somewhat with equity markets shedding gains as investors start to mull the impact of a stronger US Dollar and weaker commodity prices.
- USD The US Dollar strengthened in response to the Fed raising rates from 0.25bps to 0.50bps. The prospect of a further four increases in rates next year keeps the bullish USD view intact. The Fed expect inflation to rebound as transitory effects dissipate and have noted the lessening of threats posed to the US economy from global factors.
- EUR The single currency was sharply lower over the week driven first by the anticipation of a US lift-off and finally by the reaction to the event. Clear policy divergence is now in play between the US and Europe and whilst markets responded with disappointment to the ECB’s latest measures it is likely that the Fed’s action should be enough to pressure EUR lower, taking some pressure off the ECB to enact further policy adjustments next year. EURUSD remains right in the middle of its 2015 range with the ECB seemingly unhappy above 1.15 and the Fed unhappy below 1.06.
- GBP Sterling suffered a sharp decline this week as the latest UK wage growth data showed confirmed for many fears that momentum was stalling. Average weekly earnings fell back from 3% to 2.4%. The unemployment rate contracted further in the 3mths to October but was not enough to support Sterling which was then driven lower by USD strength in the wake of lift-off. This latest wage growth data endorses the unwinding of UK rate hike expectations as one of the key drivers behind the argument for UK lift-off starts to fade.
- JPY Despite being heavily sold ahead of and in reaction to US lift-off, the Japanese Yen managed to rebound sharply on the week to reclaim the majority of losses. The action was driven by the BOJ’s December meeting which saw the central bank once again sticking to its guns and refraining from further easing. Although the size of its quantitative easing package remains the same the BOJ did make some technical adjustments to its ETF purchase program. The BOJ retain their optimistic outlook for the domestic economy, bolstered by an upward revision to recent 3Q GDP which was actually shown to have expanded rather than contracted as initially suggested by the data. In the near term, JPY remains supported but many players feel the adjustments to the ETF purchases are simply a stop-gap ahead of further easing next year.
- AUD The Australian Dollar was led lower over the week as a stronger US Dollar and sliding commodity prices weighed sentiment. The RBA December meeting minutes release saw the central bank sounding upbeat about the domestic economic outlook, expecting growth to pick up steadily over the next two years, despite inflation remaining below its target level which may see scope for further easing in future if the outlook doesn’t improve.
- CAD The Canadian Dollar continued its relentless decline this week as Oil prices continued to forge lower ground and the US Dollar strengthened. Oil, which plumbed a new multi-year low at $34.50 per barrel this week, is weighing significantly on CAD and boosting expectations for further easing by BOC. Canadian CPI on Friday came in below expectations compounding expectations for further BOC easing.