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Euro Shrugs Off ECB, USD Falls Despite Strong Data

Published 12/14/2017, 03:16 PM
Updated 07/09/2023, 06:31 AM

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

Despite strong U.S. retail sales, there was very little consistency in the performance of Thursday's U.S. dollar. The greenback traded lower against the Japanese yen, sterling, Swiss franc and Australian dollar but moved higher against the euro, Canadian and New Zealand dollars. Not only did retail sales rise two times more than expected but demand in October was also revised higher. There was absolutely nothing negative about the report, which showed that rising wages sparked solid demand going into the holiday shopping season. Excluding autos and gas, retail sales rose 0.8%, which was the strongest increase in more than 3 years. Combined with the second-lowest jobless claims reading since 1973, the dollar should have appreciated across the board. While the U.S. dollar received an initial boost, the gains fizzled as the day progressed. The fact that the FOMC meeting is behind us is the only explanation for the lack of excitement from dollar bulls who don’t see Thursday’s report having a significant impact on Fed policy as the next major monetary policy meeting isn’t until March. On a technical basis, USD/JPY still looks vulnerable to a correction and a possible break of 112.00.

Meanwhile, the European Central Bank’s monetary policy announcement was the biggest story of the day.
As expected, the ECB left interest rates unchanged and upgraded its growth forecasts substantially. ECB now sees the economy expanding by 2.4% this year from 2.2% and it raised its 2018 GDP forecast to 2.3% from 1.8%. These higher growth projections are consistent with the IFO forecast and the latest increase in Eurozone PMIs. The ECB also boosted next year’s inflation forecast but left this year’s projection unchanged. The euro popped on the back of Mario Draghi’s optimism but reversed course halfway through his speech after the central-bank president admitted that headline inflation is likely to slow in the coming months. While Draghi’s message was more hawkish than the market anticipated, the main takeaway is that even though the economy is improving, he's not planning to raise interest rates anytime soon. Draghi repeated that rates would remain at current levels well past the end of QE, which puts them behind the Fed’s 2018 tightening schedule and explains why EUR/USD dropped below 1.18. The Swiss National Bank also left interest rates unchanged and upgraded its growth and inflation forecasts. With that in mind, they still want to see the franc lower and warned of currency intervention as needed.

Sterling barely reacted to the Bank of England’s decision to leave interest rates unchanged.
This was widely expected and the vote was unanimous. Having just raised interest rates at its last meeting, the BoE had little desire to tighten again. There was no mention of inflation peaking and instead, the central bank said domestic price pressures would build gradually as the labor market remains tight. BoE sees the need for modest tightening in the coming years but any rate increases will be limited and gradual and, most importantly, it felt it was too soon to gauge the impact of the November hike and so far, it sees economic indicators as softer than expected in the fourth quarter. This view is at odds with recent data, showing the economy strengthening including retail sales, which rose 1.1% in November, 3 times more than expected. Excluding autos, demand was even stronger at 1.2%. This healthy report follows the uptick in average weekly earnings, which also picked up in October. These latest economic reports reflect strength rather than weakness in the economy but the BoE wanted to make it clear that it sees no reason to tighten again in the near future. As for the EU Summit, so far no meaningful headlines have been made but given how things have proceeded, the EU should give its approval for moving to the next step of Brexit negotiations. Sterling is still trading well and above the 20-day SMA making a move to 1.35 still likely.

USD/CAD was the day’s biggest mover. The loonie was under pressure for most of the morning up until the point when Bank of Canada Governor Poloz said he is increasingly confident that less stimulus is needed over time. Poloz felt the economy is close to reaching full capacity and while uncertainties remain, necessitating cautiousness on rates, his view on less labor-market slack and early signs of firms offering higher wages puts rate hikes next year back into play. USD/CAD dropped below 1.28 on the back of data, shedding 120 pips in less than an hour and appears poised for a break of 1.27. The Australian dollar extended its gains for the fourth consecutive trading day on an exceptionally strong labor-market report. As reported by our colleague Boris Schlossberg, Australia generated 61K new jobs versus 19K eyed as the unemployment rate remained steady at 5.4% while participation rate climbed to 65.5% from 65.1% the month prior. The news caps an incredibly strong year for jobs in the Australian economy, which saw employment expand at a 3.2% pace in 2017. Furthermore, fully 80% of the jobs have been full-time, suggesting that broader GDP growth should remain sound for the foreseeable future. The momentum provided by the jobs report should take AUD/USD to 77 cents. The New Zealand dollar pulled back ahead of Thursday’s manufacturing PMI report. NZD was driven higher this week by the selection of a new RBNZ governor but that should not detract from the fact that New Zealand’s economy remains weak. The PMI report will let us know if the latest gains are also supported by underlying improvements in the economy.

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