European Session Market jitters over Fed policy pushed the US dollar down to the 115 yen level in Tuesday’s European session as the FOMC begins its 2-day meeting. The greenback slipped to 114.96 yen before rebounding back above 115 as investors grew nervous over the outlook for future Fed policy, while an expected rate hike of 25bps in the fed funds rate has been almost fully priced in by the futures market.
The Federal Open Market Committee will publish its latest quarterly economic projections tomorrow, which will include interest rate forecasts for 2017. Analysts will be looking to see whether Fed policymakers have shifted their outlook since their last meeting following Trump’s US election win in November that generated expectations of looser fiscal policy in the United States.
The yield on 10-year Treasury notes eased back today, having risen to the highest since September 2014 on Monday, although 2-year treasury yields were firmer. Eurozone government bonds meanwhile, got a boost on receding fears of an Italian banking crisis, driving yields lower.
Italy’s new Prime Minister, Paolo Gentiloni, today confirmed that the Italian government would step in to rescue the country’s third largest bank if recapitalization efforts with private investors are unsuccessful. In addition, Italy’s largest lender, UniCredit, launched a €13 billion share issue to boost its finances, helping banking stocks across Europe head higher.
The euro traded in a tight range between 1.06 and 1.065 versus the dollar for most of the session and saw little impact from a batch of German data. German inflation was unrevised at 0.8% year-on-year in November’s final reading but the ZEW investor sentiment survey came in mixed. The ZEW economic sentiment index was unchanged at 13.8 in December, missing estimates of 14.0. But the ZEW current conditions index beat expectations of 59.1 to rise to 63.5 in December.
The other major data of the session came out of the UK with the release of November CPI figures. Headline inflation in the UK rose to 1.2% y/y in November from 0.9% the prior month. This was slightly stronger than forecasts of 1.1% and the highest since October 2014. Core inflation also beat estimates, increasing to 1.4% from 1.2% instead of 1.3% as expected. There was some relief however from factory prices, as both input and output prices were slightly weaker than forecasts.
The pound jumped above 1.27 dollars after the data and was last trading at 1.2716 dollars. Sterling looks set to remain in focus this week as unemployment and retail sales figures will follow on Wednesday and Thursday respectively, while the Bank of England’s latest policy decision is also due on Thursday. Further lifting the pound this week was a statement from the UK finance minister, Philip Hammond, who gave his backing to a transitional deal for the UK once it leaves the EU in order to smoothen the Brexit process on businesses.
In other currencies, the Australian and New Zealand dollars held on to yesterday’s gains as they were helped by higher yields and a softer greenback. The aussie was flat on the day in late European session at 0.7495, but the kiwi was slightly firmer at 0.7206 against the US dollar.
The Canadian dollar was also stronger despite oil prices trading near yesterday’s lows for much of the session. USDCAD fell to a near 2-month low of 1.3105 in late European trading as analysts bet on a more positive outlook for oil, which Canada is a major exporter of.
Nevertheless, oil prices struggled for direction on Tuesday after yesterday’s big rally on the back of Saturday’s non-OPEC deal to cut output. Reports that some OPEC members have already started to cut supply provided little support, with WTI oil trading slightly down at $52.70 a barrel in late European session.
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