Currency news 19/Dec - Sterling rallies close to €1.20 v Euro and close to $1.64
 

UK News & Data releases

GBP rallied yesterday following some better-than-expected labour market data. The unemployment rate fell to 7.4%, the lowest level since April 2009, and there was another sizable decline in the claimant count of 36.7k. While the December MPC Minutes revealed a slightly more dovish tone than the previous month, with the Bank suggesting a continued appreciation in GBP would put downward pressure on growth, this was largely overshadowed by the strong employment numbers. While the Bank may be jawboning in an attempt to talk down the currency, it's difficult to expect much market impact if we see a continued recovery in the labour market.

This may trigger speculation that policy rates could rise earlier than current market pricing of mid-2015 and may put pressure on the MPC to reassess the point at which they expect the unemployment rate to hit the 7% target, which was recently revised to mid-2015. For today, UK retail sales will be a focus, however should support the GBP upside bias. Last month, retail sales surprised falling more than expected, but headline retail sales is expected to have rebound in November by 0.3% m/m.

USA News & Data releases

Last night, the FOMC announced 'tapering' of $10bn a month, owing to the improvement in labour market conditions. While the Fed had a slight positive view on the economic recovery, they maintained a dovish stance on interest rates and refined their forward guidance.

In order to reinforce the lower rates for longer message they indicated that rates would remain unchanged 'well past the time that the unemployment rate declines below 6.5%' and also lowered the fed fund rate projections. There was a clear shift toward forward guidance as the Fed's preferred monetary policy tool. They gave no indication of the likely pace of tapering, but suggested the Fed would take 'measured steps' to reduce asset purchases which will remain data dependent.

Euro zone news & data releases

The German IFO survey was mixed yesterday and was perhaps somewhat disappointing after the strong German manufacturing PMI and ZEW survey. The Euro to US Dollar came under pressure in the run up to the FOMC, in part weighed down by EUR/GBP which traded lower on a stronger Pound, the Euro fell further post-FOMC announcement.

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