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Two more sleeps until US Rate Decision

Two more sleeps until US Rate Decision

US Retail Sales were below expectations on Friday, but showed improvement year-on-year at 0.2%. Excluding auto sales, the performance beat expectations in a month that included Black Friday sales. Trading patterns pushed the Dollar price to 1.5220 over the weekend, but this morning’s opening was little different from Friday, at 1.5150. Tomorrow will see inflation data in the form of Consumer Price Indices. Unless there is a particularly disappointing shock result from this data, the market will be focussed on Wednesday evening’s Interest Rate Decision.

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Last week ended with somewhat of a whimper as trends were maintained from a Euro perspective. In recent weeks, we have witnessed a wave of Euro strength in the wake of the deposit interest rate cut by European Central Bank (ECB) President, Mario Draghi.

Mr Draghi will be in focus again this morning as he addresses the press. Many feel that the context for any comments will stem from lingering disappointment as a result of the adjustment to policy stimulus which occurred on the 3rd December. Some ECB policymakers have pushed the blame onto over-expectant market participants as opposed to substandard communication inside the Central Bank. This has created a heightened expectation for further policy easing, especially since Mr Draghi said as much, reiterating that there “is no limit to policy easing in order to meet the ECB’s inflation target”.

This could suggest that the recent Euro strength could be rather short lived. However, when we see this turnaround is slightly more difficult to predict. Especially given that the bloc currency has surprised most banks’ forecasts in Q4 so far.

With no Sterling data today and with the Bank of England quarterly report due at midday tomorrow, it’s worth having a recap of where we stand. The UK is currently conducting a £375 billion pound quantitative easing program and inflation is below 0. Mark Carney has voted against a rate hike repeatedly and the vote to keep the £375bn stimulus package is unanimous. It will take months for oil prices to filter through to already non-existent inflation, removing any reason for an interest rate rise.

More stimulus means more supply, which is in effect devaluation, especially against economies where positive monetary policy is implemented, so Dollar buyers should start planning now for next year.

Data to watch: 11am Mario Draghi speaks.

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