The US dollar extended gains against sterling to five straight sessions as markets await what could be the most significant monetary policy decision in years. Sterling fell towards a three-week low against the US dollar while the euro climbed to a six-week high against the British pound and held near an earlier six-week peak against the US dollar following strong German investor sentiment data which helped ease some concerns about the euro area’s economic outlook.
Sterling
Sterling fell towards a three-week low against the US dollar after weaker than expected UK inflation data reduced some expectations of an early rate hike by the Bank of England. Consumer price inflation slowed to 2.1 per cent (y/y) in November compared with forecasts of 2.2 per cent, which was the lowest rate in four years. Lower inflation may allow the BoE to keep interest rates low even if Britain’s economic recovery moves up into a higher gear next year. Nevertheless, all eyes will be on the minutes from the BoE’s December meeting for any comments about exchange rates while separate data on UK unemployment could have a big impact on sterling.
US dollar
The US dollar extended gains against sterling to five straight sessions as markets awaits what could be the most significant monetary policy decision in years. The greenback could rally broadly into year-end against its rivals and start to open up new trading ranges for early 2014, should the Federal Reserve finally end speculation and start trimming its $85 billion-a-month of asset purchases. The Fed will conclude its two-day policy meeting followed by a press conference in which chairman Ben Bernanke may just launch the Fed’s highly anticipated stimulus tapering plan. However, any tapering may land with an adjustment to the Fed’s forward guidance strategy, a plan designed to keep interest rate expectations low for longer. Tapering plus a stronger low rates pledge, or a dovish taper, could hurt the US dollar by harming the currency’s yield appeal and encouraging investors to still favour risk.
Euro
The euro climbed to a six-week high against the British pound and held near an earlier six-week peak against the US dollar following strong German investor sentiment data, which helped ease some concerns about the euro area’s economic outlook. Looking ahead to 2014, the final reading of eurozone inflation was confirmed at 0.9 per cent for November, a worryingly low level that forces the European Central Bank to consider more monetary easing. Still, the euro’s short-term outlook will hinge on the US monetary policy decision, with a dovish announcement likely to buoy the euro.