Dollar weakens as Fed highlight concerns over stalling price levels

The USD has weakened overnight following the latest Federal Reserve interest rate meeting.

As expected, the Fed left their balance sheets and interest rates on hold. They highlighted how solid the US jobs market is performing, which is currently running above their technical full employment level, and how robust economic growth is. However, they also showed concern that inflation continues to miss their target and has done so for the past 5 years.

Overall they look set to announce balance sheet reduction measures at their next meeting (which is a USD positive) but the dovish tones concerning low inflation has reduced the odds of another Fed rate hike before year-end (USD negative). Although they’re like to keep gradually increasing the rates, it might not be as fast as some investors had expected which has disappointed some dollar bulls.

In other news, figures yesterday showed that the UK economy only grew steadily in the second quarter of this year (0.3%). Although this was in line with expectations, and up from the first quarter (0.2%), it still undershoots the BoE’s forecasts and is not enough to increase the number of policymakers voting to hike rates. In fact, there is a chance that the BoE may start to change their overall tone after being more optimistic over the previous month. Their recent hawkish language may have been aimed at strengthening Sterling slightly to help bring inflation back in line (as stronger pound brings costs down).

As a result, the GBP/USD has moved up around 1% from yesterday’s low and currently trades at a 10-mth high. The EUR/USD also pushed up around 1% and hit a fresh 2.5 year high.

Euro rallies as tightening of policy gets closer

The Euro has rallied this afternoon following the latest ECB interest rate meeting.

Although they were unanimous in voting to keep their monetary stimulus programme on hold this month, the market took signs that the ECB will make a decision to start tapering back on their quantitative easing levels before the end of the year. Although President Draghi tried to maintain an air of caution (to not make the Euro rally too much), the market saw through this and started to buy the Euro back.

Growth in the Euro-zone continues to improve (17 straight quarters in a row), and although inflation is still well below the ECB’s target, investors have grown confident that the market can now stand more on its own feet and that a gradual normalisation of policy is needed. So called quantitative easing, has essentially pumped money into the economy and helped rekindle growth after one of history’s most severe economic crashes. Although there are obvious risks to withdrawing this unprecedented stimulus too early, and particularly how it will affect the poorer performing member countries, the risks to not changing their programme could be more damaging in the longer term.

In other news, UK retail sales figures came in above expectations this morning but this was not enough to counteract the impact of Tuesday’s lower-than-expected inflation figures. The UK price data cut back the odds of the BoE hiking rates before the end of the year which was a negative for Sterling. Furthermore, comments from UK Ministers this morning, pointing towards a ‘hard’ Brexit, was another negative for the Pound.

As a result, the GBP/EUR now trades at an 8-mth low having lost nearly 1.5% today. The EUR/USD has also rallied close to 1.5% and not too far away from the highest levels we’ve seen for 2.5 years. The GBP/USD remains buoyant.