Not so sure about the Fed


Although a rate increase by the Federal Open Market Committee was not a foregone conclusion, there would have been considerable surprise among investors had it not delivered one. The target range for the federal funds rate went up by a quarter of a percentage point to 2.25%-2.5%.

No surprise there, then, but the tone of the FOMC statement was not exactly what investors had expected. They had anticipated a dovish story, playing down the likelihood of future rate increases. What they got was an indication that rates would go up twice next year and once more in 2020. In his press conference the Fed chairman gave the impression that he is not unduly worried about share prices or presidential criticism. Stock markets and "risky" commodity currencies tanked and the USD jumped higher. 


Having fallen in the wake of the Fed rate hike the EUR steadied before moving back up during the early London session. It was not so much a matter of euro strength, more a matter of dollar weakness. A significant number of economists and commentators were asking this morning whether it is still appropriate for the Fed to press ahead with rate increases even as US growth threatens to slow.

The euro zone economy had little to say for itself. In October the current account surplus widened to a seasonally-adjusted €26.2bn and Italy's producer price index was up by 4.5% in the year to November. The EUR is 0.8% higher on the day against the USD.


Like the EUR, the CAD lost ground to the USD following the Fed's announcement and bounced back in early Europe as the USD lost its way. It is practically unchanged on the day against the USD.

Yesterday's Canadian consumer price index figures sent the CAD briefly lower but had no lasting impact. Headline inflation slowed by a little more than expected, to 1.7%. The Bank of Canada's "core" reading, which ignores volatile components such as fresh produce and gas, was almost unchanged at 1.5%.


Sterling followed a very similar path to that of the EUR, falling after the Fed rate hike and recovering this morning against the retreating USD. As is often the case, the GBP could not quite keep up with the more heavily-traded EUR. It strengthened by 0.3% against the USD.

UK retail sales data this morning were constructive for the GBP but did not add much to the debate. Sales were up by 1.4% in November and 3.6% above the same month last year. The Bank of England will make its own policy announcement this morning. Bank rate is fully expected to remain unchanged at 0.75%.


The yen's story was similar to that of the other major currencies: weakness immediately after the Fed statement and recovery in the early hours of this morning. It is a net 0.6% higher on the day.

At its last meeting of the year the Bank of Japan's monetary policy committee did what it has done for the last three years, holding the interest rate on financial institutions' deposits with the central bank at -0.1%. Governor Haruhiko Kuroda said the economic risks are tilted to the downside and pointed out that rate cuts and increased asset purchases could be employed if necessary.

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