This week was always only ever going to be about the US Federal Reserve’s interest rate decision and subsequent statement which had been so long anticipated.
From a Euro perspective the single currency started the week on a firm footing following the previous week’s European Central Bank decision to extend the time frame of the quantitative easing programme but not to raise the monthly amount of asset programme purchases.
On the data front Germany’s ZEW economic sentiment gauge climbed for a second consecutive month up 5.7 point on November’s result, shaking off any concerns there may have been surrounding the Volkswagen emission scandal and also the global slowdown throughout the in the Asian economies and emerging market nations.
Whilst the ZEW index painted an upbeat picture of the German economy, the IFO business confidence indicator slipped to 108.7 in December from 109.0 the previous month. The news was shrugged off as the German central bank maintained its projection for growth of 1.8%.
From the UK we were treated to the latest news on inflation, which edged back above zero during November for the first time in four months.
The UK unemployment rate dipped again, this time to 5.2% down from 5.3%, although sterling was unable to take advantage of this positive news, as the markets were preoccupied with the lack of wage growth with the total pay increase at 2.4% down from 3.0%. Such a lack of wage inflation helps deflect any calls for near term UK interest rate hikes, leaving the pound susceptible to weakness.
The GBP/€ range over the week has seen a low of €1.3670 and a high of €1.3860, with the price settling at the end of the week in the mid €1.37’s.
Across the pond we saw the Federal Open Market Committee members deliver their unanimous decision to hike US rates by 25 basis points on Thursday, its first hike since 2016.
The US dollar strengthened against both the pound and the Euro as monetary policy divergence is taken into account by the markets.
The move had been well anticipated owing to the strengthening conditions of the US economic recovery.
Federal Reserve Chairman Janet Yellen was keen to stipulate that the pace and trajectory of future hikes will be low and slow in the years ahead, although this change to monetary policy is highly significant as the USA now exits the zero interest rate era.
The FED officials also upgraded their gross domestic product forecast for next year to 2.4% taking into account the recent data improvements, most notably the uplift in employment conditions. The message from the Federal Reserve has to be seen as rather dovish as the rate of increase will be gradual to align with the belief that US inflation will not return to the 2% target level until 2018.
Euro/ US$ declined form a high over the week of $1.1060 to record a low of $1.08.
Data will be reasonably light in the period before Christmas, however the single currency may take direction next week as the outcome of this weekend’s Spanish election becomes clear. The current Prime Minister Mariano Rajoy appears to hold the lead, although recent polls suggest that the only outcome will be the formation of a coalition government of sorts with the makeup very uncertain.
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