Headlines
• Federal Reserve Hikes Cash Rate
• GBP Softens despite Positive Retail Sales
• ECB Highlight Downside Risks to Eurozone Growth
• US Dollar Little Changed after FOMC Decision
GBP/EUR – Pound Down Despite Better-than-Forecast British Retail Sales Growth
The Pound Sterling to Euro (GBP/EUR) exchange rate was trending in the region of 1.3756 after weak German data trimmed the Euro’s previous gains.
British Retail Sales came in at 3.9% in November on the year, bettering the market consensus of 2.3% sales growth, with November’s monthly Retail Sales also beating forecasts. In addition, both annual and monthly Retail Sales including Auto Fuel, which is considered a more volatile a gauge, eclipsed expectations in November. Despite this positive data, however, the Pound failed to advance versus its major peers as yesterday’s disappointing earnings data continued to weigh on Sterling demand. Many traders have been forced to delay bets regarding a Bank of England (BoE) interest rate decision deep into 2017 after policymakers highlighted the slow pace of wage growth as a significant concern.
The Euro, meanwhile, shed earlier gains after the European Central Bank (ECB) Economic Bulletin flagged up concerns regarding downside risks to the Eurozone’s outlook. In addition to highlighting uncertainty regarding global economic developments and broader geopolitical risks, the ECB also argued that a lack of foreign demand for Eurozone exports may have serious ramifications. The huge drop in oil prices is another principle concern, with global inflation struggling against bearish commodity prices.
GBP/USD – ‘Cable’ Softens after FOMC Hikes the Cash Rate
The Pound Sterling to US Dollar (GBP/USD) exchange rate dropped below key support levels to trend in the region of 1.4926 during Thursday’s European session.
After the Federal Reserve hiked the benchmark interest rate by 25 basis points, the first increase in nine years, the US Dollar edged higher versus many of its peers. The appreciation was minimal, however, given that traders had already priced-in a rate hike. However, some investors were surprised by Fed Chairwoman Janet Yellen’s degree of confidence in the US economic outlook. Yellen did assert that the Fed will tighten policy over a long and gradual process.
USD/GBP – Trending Higher ahead on Policy Divergence
The US Dollar to Pound Sterling (USD/GBP) exchange rate was trending within the range of 0.6670 to 0.6702 during Thursday’s European session.
In a recent statement many Bank of England (BoE) policymakers asserted that there is no ‘mechanical’ connection between the British and North American central bank’s in terms of policy outlook. In simpler terms BoE policymakers do not feel pressured into increasing the overnight cash rate just because the Fed have.
Whilst the Federal Reserve stated that policy will tighten very gradually, most traders expect the central bank to hike the cash rate at least once more during 2016. In contrast, traders have been forced to delay BoE rate hike bets deep into 2017 after the latest set of labour market figures showed disappointing wage growth. In minutes corresponding to the most recent BoE interest rate decision many policymakers highlighted the slow pace of British wage growth as one of the main reasons to keep policy outlook accommodative.
EUR/USD – Euro Softens after German IFO Data Disappoints
The Euro to US Dollar (EUR/USD) exchange rate declined by around -0.2% to trend in the region of 1.0846 during Thursday’s European session.
European economic data produced a mixed-bag of results on Thursday. German IFO Business Climate, Current Assessment, and Expectations all failed to meet with the respective median market forecasts. However, October’s Eurozone Construction Output improved on both a monthly and annual basis.
The single currency avoided a larger depreciation following the Fed rate decision thanks to speculation that the Fed’s plan to tighten policy gradually should give the European Central Bank’s (ECB) program of quantitative easing more time to affect positive changes. However, the ECB’s concerns regarding global economic conditions are just, especially given that monetary policy cannot improve demand for exports or increase price pressures on a global scale.