FOMC Hawks Save the Dollar, but Pressure Remains

Earlier in the Day:

Economic data released through the Asian session this morning included November building approvals out of Australia and the UK’s December BRC Retail Sales Monitor.

Building approvals surged by 11.7%, coming in well ahead of a forecasted 1.3% decline, following October’s downwardly revised 0.1% fall. The gains were largely attributed to the state of Victoria and a continued shift in living conditions away from private houses to apartments, with urbanisation driving the housing sector.

The Aussie Dollar moved from $0.7844 to $0.78514 upon release of the figures, though the general outlook for the real estate sector continues to be on the softer side, following a tightening to credit conditions last year in a bid too cool down the sector.

For the early stat out of the UK, the retail sales indicator continued to baffle, with retail sales on a positive footing in spite of tepid wage growth, rising household debt and inflation rates sitting at above 3%. Due to the timing of the figures, the Pound showed little response to the figures, with the government’s retail sales figures of far greater influence.

While the stats were positive, the biggest news of the morning was the BoJ’s decision to reduce the size of its bond purchases for medium term maturities by 5% to ¥190bn. There had been talk of dissent in the last BoJ meeting and the latest move is the first sign of a possible shift in policy.

At the time of writing, the Yen was up 0.39% to ¥112.65 against the Dollar, with the gains coming off the back of the shift in policy, while the Aussie Dollar was up 0.18% to 0.7856, reversing much of Monday’s losses.

In the equity markets, the gains in the Yen failed to stifle the Nikkei, which closed out the day up 0.55%, with the ASX300 seeing just a 0.09% rise, while the Hang Seng and CSI300 were up 0.28% and 0.57% respectively at the time of writing.

The Dow’s break from the recent rally failed to cause the markets to pause, with market risk appetite unwavering at the start of the year.

The Day Ahead:

Economic data out of the Eurozone this morning includes November trade and industrial production figures out of Germany, together with unemployment numbers out of the Eurozone.

Following an unexpected fall in German factory orders, the markets will certainly be looking for industrial production and trade figures to impress. Sensitivity to economic data out of Germany will be on the rise this week as Merkel looks to close out coalition talks and deliver another term under the grand coalition.

The Eurozone’s unemployment figures will likely play second fiddle to this morning’s data out of Germany, which are forecasted to be EUR positive.

At the time of writing, the EUR was down 0.04% to $1.1962, with the EUR closing at sub-$1.2 levels on Monday for the first time since 28^th December.

For the Pound, this morning’s retail sales figures would have provided some support and, with no material stats scheduled for release this morning, there’s unlikely to be too much to influence ahead of key data scheduled for release tomorrow.

At the time of writing, the Pound was up 0.05% to $1.3575, with the markets now looking for progress on Brexit, the UK having less than a year to wrap up talks.

Across the Pond, economic data out of the U.S is limited to November’s JOLTs job openings that will be of some interest to the markets, following last week’s softer than expected nonfarm payroll figures.

Recent upside in the Dollar has come off the back of some hawkish FOMC member commentary, with voting members Mester and Williams talking up the number of rate hikes from the two that the markets have pencilled in.

While Williams spoke of 3 hikes, in line with the median projection released by the FOMC in December, the more hawkish Mester talked of a possible 4, which is certainly far more aggressive than many foresee, with inflation where it is today.

At the time of writing, the Dollar Spot Index was down 0.07% to 92.29, with talks of U.S President Trump being interviewed by Special Counsel Robert Mueller something that will also need to be considered.