Euro slumps to fresh 12 month low on growing Fed hike hopes

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18 November 2016

Written by
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The Euro slipped to a fresh one year low against the US Dollar on Thursday as investors and analysts alike continued to ramp up expectations for an interest rate hike by the Federal Reserve before the end of the year.

C
hair of the Federal Reserve Janet Yellen was unsurprisingly non-committal during her appearance in front of Congress yesterday. Yellen indicated that the Fed could raise rates “relatively soon”, citing improvements in inflation and the labour market.

Economic news out of the US yesterday was mostly positive, further firming the case for an increase in interest rates next month. Inflation in October rose modestly as expected, increasing to a six month high 1.6% from 1.5%. Initial jobless claims also continued to point to an improvement in the labour market. Claims last week fell sharply to a 43 year low 235,000 from 254,000.

Sterling deprecated for the fifth straight London session on Thursday, with yesterday morning’s impressive retail sales providing very little support for the currency. Sales increased sharply in October, soaring at their fastest annual pace in 14 years, due in part to the cold weather and bumper Halloween sales. Sales increased by 7.4% in the year to October, considerably higher than September’s 4.2% and well above even the most optimistic of forecasts.

Meanwhile, the European Central Bank released the meeting accounts from its monetary policy meeting last month. The accounts reiterated the need to maintain the existing unprecedented monetary stimulus and to decide in December whether to extend the bank’s quantitative easing programme. December is beginning to shape up as a particularly busy month in the currency markets with crucial Fed and ECB meetings and the Italian referendum.

President of the European Central Bank Mario Draghi will be speaking in Europe this morning. Speeches from Fed member’s Bullard, George and Dudley will also be worth looking out for today.

Major currencies in detail:

GBP

Broad Dollar strength sent the Pound 0.1% lower yesterday.

Thursday’s strong retail sales numbers provided further evidence that consumers in the UK have remained undeterred by the uncertainty created following the Brexit vote in June. On a monthly basis sales increased by 1.9% in September while the core measure, of which strips out volatile priced products, rose by 2% in the month and 7.6% on a year previous. Sales growth is expected to moderate in the coming months as clothing sales return back to normal following unseasonably cold weather.

Senior Bank of England member Ben Broadbent will be speaking at around 9am this morning in an otherwise relatively quiet end to the week in the UK.

EUR

The Euro remained under heavy pressure from the prospect of higher rates in the US on Thursday, depreciating by 0.5% against the Dollar during London trading.

Inflation in the Eurozone came in unrevised for September at 0.5%, with the core index remaining stuck below one percent at 0.8%. Inflation has extended its prolonged run well below the ECB’s 2% target to every month for the past three-and-a-half years. We think it is now a near certainty that the central bank will extend its QE programme by at least six months at its meeting next month as it continues its efforts to stimulate inflation in the Euro-area.

All attention will be on Draghi when he speaks at 08:00 UK time this morning, with no major economic data set for release today.

USD

The Dollar index extended its run of gains yesterday, rising by 0.4% to a fresh thirteen-and-a-half year high.

In tandem to yesterday strong jobless claims figures, housing data also came in better than expected. Building permits rose slightly by 40,000 to 1.23 million, while housing starts increased sharply to 1.32 million from 1.05 million.

However, almost all attention was on Yellen yesterday, who claimed that the US economy was making “very good progress”. She also claimed that delayed a rate increase would present risks, with markets now pricing in a near certainty of a hike next month.

Speeches from a number of Fed members today are likely to reinforce the opinion that higher rates in the US are on the way next month.

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