No surprises from the FOMC

After an intense period of high volatility in the financial markets, exactly what the Federal Reserve didn’t need to do yesterday was spook investors further and they delivered. Following global economic health concerns resurfacing and the decline in oil prices pressuring inflation levels, there was anxiety that the Federal Reserve might tease the prospect of pausing plans to normalize monetary policy. We didn’t expect that to occur and the overall message was in line with expectations yesterday, where the underlying message was that the US economic conditions are continuing to make progress, but more of the same is required, please.

The reiteration that the Federal Reserve will be intending to raise US interest rates in the coming year resulted in the USD rallying yesterday evening, while also providing investor sentiment with a vote of confidence following a hectic couple of days in the financial markets. Moving forward, it is expected that the decline in oil prices will weigh on inflation levels, but this will be short-term and will not delay the Fed from raising rates from the middle of next year. From a positive standpoint, the decline in oil prices is going to lead to improved disposable income at a crucial period of the year for US retailers. We are looking at the potential for the US to conclude the year with increased consumer expenditure. Bearing in mind consumer spending represents 70% of the US economy, this will provide Q4 GDP figures with a boost.

The EURUSD was a heavy faller yesterday, pressured by a combination of USD strength and dovish comments from European Central Bank Executive Board member Benoit Coeure. Coeure, who stressed the “broad consensus was that we can do more” to combat dangerously low Eurozone inflation levels; encouraging the bears to price in further stimulus from the ECB next year. The Eurodollar sank by around 190 pips throughout the day, with the bearish bias continuing on Thursday morning. The pair has already declined by a further 70 pips and is currently valued around 1.2270. The combination of the Federal Reserve confirming its expectations to raise rates next year, alongside headlining fears around the EU economy, has just highlighted that the longer-term risks remain very much on the downside.

After encountering appreciation encouraged by USD weakness, the GBPUSD erased recent gains yesterday. The Cable declined by 180 pips, with the pair concluding trading at 1.5543. This is just pips away from the current 2014 low at 1.5540 and bearing in mind the Bank of England’s (BoE) strong views on weak price pressures would have strengthened considerably following UK inflation levels falling to a 12-year low, we are looking at the potential for the pair to record a further 2014 low before the end of the year. In regards to today, UK retail sales for November are released and the current expectations are for a 0.3% increase. The decline in fuel prices may have led to higher than expected retail sales data, which could lead to the pair making an attempt to re-enter 1.56 later today.