US Dollar Eases on FOMC Minutes

Daily Analysis - 19/11/2015

Dollar Momentum Shifted After the FOMC Minutes Confirmed That Policymakers Were Ready to Tighten

The October Fed minutes showed a broad consensus being formed among Federal Reserve policymakers with fewer dovish views towards rate hikes. Most of the Fed members believed that the economic conditions were satisfactory to face a prospective rate hike by the 'next meeting' in December.

FOMC Confirms December Liftoff

The minutes from the October FOMC meeting have seen most of the Fed members agree to the fact that the US economy was ready for rate hikes by December amidst diminishing risks to the global economy. On inflation, the Federal Reserve members were still not reasonably ‘confident’ on the inflation outlook. The minutes reiterated that the liftoff decision would be data dependent with the risks being finely balanced. While the US Dollar rallied into the release of the minutes, the Greenback took a pause as the commodities and most of the risk currencies managed to bounce back on profit-taking. The US S&P 500 Index took the news in its stride, closing on a bullish note at 2078 yesterday. Previously broken support at 2086 is likely to be tested sooner than later and established longer-term resistance at 2086 could potentially pose downside risks to the gains in the S&P 500.

German Bunds Sold At Record Low Yields

Going by the German bond auction held yesterday, the 2-year bonds touched a new record low as yields dived to -0.38%. The negative bond yields from Germany implies that investors are actually paying interest to Germany in order to own the 2-year bonds and ensure the safe return of principal. The sharp decline in the 2-year bond yields is pointing to strong market expectations that the ECB is likely to announce additional easing measures when it meets on December 2^nd, including expanding the asset purchases from the current €60 billion per month to €80 billion per month while simultaneously cutting interest rates by another 10 basis points. Opinions however remain divided on whether the ECB will follow through at the December. Given current market expectations, anything short from delivering on added easing could trigger a strong reactionary rally in the Euro as the markets remain heavily short the EURUSD pair.

Another Month of Bank of Japan Inaction

The Bank of Japan met earlier today for its monthly monetary policy review with the annual rise in monetary base was left unchanged at 80 trillion Yen. The decision to leave the BoJ's quantitative and qualitative easing program unchanged comes after comments a few weeks back from BoJ official Harada noted that the Central bank was in no hurry to expand the monetary base to speed up inflation. The BoJ strongly believes that the current downturn in energy prices was to be blamed for lack of inflation rising, but remains optimistic that the 2.00% inflation target would be reached in 2016. The Bank of Japan has left monetary policy untouched for the most part this year despite most economists forecasting that the Japanese Central Bank would ease policy further and expand purchases. USDJPY was weak after yesterday’s FOMC minutes and this morning’s inaction from the BoJ has kept the Yen a bit stronger.

UK Retail Sales Forecast to Decline

Retail sales numbers from the UK are due later today with estimates projecting a sales decline of -0.50% for the month of October, down from a 1.90% increase in September. On an annualized basis, retail sales are expected to rise 4.50%. The core retail sales figure, which strips out the volatile components including energy, is expected to fall -0.50% after rising 1.70% previously. Considering that retail sales have seen tremendous swings, expectations are mixed in anticipation of the release which could potentially see a revision to the prior month's numbers. Nevertheless, UK retail sales have posted consistent gains over the year. The GBPUSD pair found initial support yesterday after BoE Deputy Governor, Dr. Ben Broadbent downplayed the BoE’s inflation forecasts noting that the concerns surrounding the inflation forecasts were misplaced. GBPUSD closed higher yesterday at 1.5235 and is currently exhibiting a bullish bias at 1.5281.