The U.S. dollar was mostly in the green overnight as markets continued to digest the Fed’s forward guidance on interest rates and in anticipation of numerous other central bank decisions early this morning.
Overview
The dollar has given back much of its gains, however.The economic docket disappointed. U.S. November retail sales fell 0.6%, below estimates and much lower than the 1.3% gain seen in October. Retail sales excluding autos fell 0.2%, also below the 0.2% gain that was forecast by economists. A separate report showed economic activity in the Philadelphia Fed region declined. The index came in at -13.8, slightly better than the dour expectation of -10.0. Traders are likely to look past the domestic data and instead focus on monetary policy events described below.
What to Watch Today…
- No major economic events are scheduled for today
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EUR ⇑
The Euro pulled back from recent highs overnight. However, the Euro is gaining modestly in early trading after the European Central Bank signaled more interest rate hikes are likely. As widely expected, the ECB hiked rates by 50 basis points, bringing rates to 2.5%. The initial reaction to the decision is that the central bank is taking a hawkish view. They said, “The Governing Council today decided to raise the three key ECB rates by 50 basis points and, based on a substantial upward revision to the inflation outlook, expects to raise them further.”Overall, the Euro has rallied nearly 10% against the U.S. dollar since November 3rd.
GBP ⇓
The British pound has fallen about a percent against the U.S. dollar. As expected, the Bank of England, raised rates by 50 basis points this morning. The move represents the 9th hike in a row and brings rates to 3.5%, a 14-year high. The sterling’s dip today is likely the result of a three-way split in voting. Six members voted for the half-a percent hike. However, Catherine Mann favored a three-quarter point hike and two other members voted to leave rates unchanged. A three-way split is rare and shows vastly different views on the best way to prop up the economy and tame inflation. The perceived dovishness of the Bank of England contrasts with the hawkishness of the European Central Bank and the apparent hesitation by the Federal Reserve to completely pivot away from its tightening cycle.
