Euro Shrugs Off ECB, USD Falls Despite Strong Data

Euro Shrugs Off ECB, USD Falls Despite Strong Data

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

Despite strong U.S. , there was very little consistency in the performance of Thursday’s . The greenback traded lower against the , , and but moved higher against the , and 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 sparked solid demand going into the holiday shopping season. , retail sales rose 0.8%, which was the strongest increase in more than 3 years. Combined with the second-lowest 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, still looks vulnerable to a correction and a possible break of 112.00.

Meanwhile, the European Central Bank’s 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 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 also left interest rates unchanged and upgraded its growth and inflation forecasts. With that in mind, they still want to see the lower and warned of currency intervention as needed.

barely reacted to the 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 , which rose 1.1% in November, 3 times more than expected. , demand was even stronger at 1.2%. This healthy report follows the uptick in , 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.

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 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 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 extended its gains for the fourth consecutive trading day on an exceptionally strong . As reported by our colleague , Australia generated 61K new jobs versus 19K eyed as the remained steady at 5.4% while 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 to 77 cents. The pulled back ahead of Thursday’s 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.