Dollar gains modestly on FOMC outcome

Yesterday, little occurred in the FX markets ahead of the FOMC. The Fed rate hike was widely expected and quite some policy divergence between the Fed and the likes of the ECB (and the BOJ) is already discounted. The Fed confirmed that policy normalisation will be gradual. The Fed dots suggest 4 additional rate hikes in 2016. This is no outright predication of what the Fed actually will do, but it is less dovish than we expected. Short-term interest futures also incorporate a second rate hike in spring rather than in the summer. This gives the dollar some additional interest rate support. The reaction on other markets (equities, oil..) will also have an impact on the performance of the dollar. If the risk-on rally slows, further sustained USD gains might be less evident short-term. Global market liquidity will also gradually dry up as soon as the post-Fed repositioning is done. Trading might become more erratic in nature. To summarize: the Fed policy decision/communication is slightly positive for the dollar, but we don’t expect a big leap higher of the dollar anytime soon. The downside of the dollar, especially against the euro, looks better protected now.

From a technical point of view, EUR/USD cleared the 38% retracement from 1.1714 to 1.0524 standing at 1.0979, making the picture again neutral. A previous range bottom/break down area comes in at 1.1087 and finally the 62% retracement from the October high at 1.1124. If this area would be broken it would make the picture dollar bearish. However after the Fed decision, this area looks better protected. A sustained decline below 1.0796 would improve the technical picture for the dollar. USD/JPY dropped below a short-term range bottom in the 122.25 area, turning the short-term picture in this cross rate negative. A sustained improvement in risk sentiment is needed to halt this decline. The pair currently tries to regain this previous support, but we are not convinced that this attempt will succeed.

EUR/GBP holding near the recent lows

On Tuesday, sterling entered calmer waters as risk sentiment improved, but the rebound missed conviction. Expectations that a BoE rate hike is still far away and lingering uncertainty on Brexit prevented a more protracted rebound. This pattern continued on Wednesday, when the UK labour data were mixed. The unemployment rate declined to 5.2% and employment growth was strong, but earnings growth slowed more than expected Sterling lost temporary ground after the labour data. EUR/GBP jumped to the 0.7290 area, but the move petered out. Later, global market moves aftere the Fed decision dominated trading in EUR/GBP and cable. EUR/GBP retested the 0.73 area around the time of the Fed decision, but declined later in line with EUR/USD. The pair closed the session at 0.7273, little changed from Tuesday’s close (0.7267). USD strength pushed cable temprory below the 1.50 mark. The pair closed the day at 1.5004 off from the 1.5040 opening levels

Today, the UK retail sales and the CBI trend orders will be published. ONS retail sales were volatile over the previous months. Domestic demand is still the key driver for UK growth. However, of late there were tentative signs that the momentum of private consumption/retail sales slowed. November retail sales are expected at 0.5% M/M and 2.2% Y/Y (after -0.9% M/M decline last month). A figure below consensus might cement expectations the a BoE rate hike is still way off and thus be sterling negative. For now, we see little positive spill-over effects from the Fed rate hike on sterling (against the euro). A sustained rebound of EUR/GBP above 0.73 would deteriorate the short-term picture for sterling. We wait for clearer signs of a topping out process before reconsidering EUR/GBP shorts.

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