Dollar Weaker as Markets Digest Dovish Shift

The U.S. dollar was under widespread pressure overnight as the market continues to digest yesterday’s Federal Reserve announcement.

Overview

The Federal Reserve hiked rates for the fourth time yesterday, which was forecast by most economists. The dollar gained in the immediate aftermath even as the central bank lowered its rate and economic forecast for 2019. The Fed now expects to hike rates and additional two times in 2019, down from three hikes at the end of their September meeting. It is worth noting that markets are only pricing in on additional hike next year. The greenback’s fortune has turned negative overnight with the Bloomberg Dollar Index dropping 0.7%.

Central bank meetings abroad also dominated headlines overnight with the Bank of England and the Bank of Japan keeping their current policies in place. However, the Swedish Riksbank surprised markets by raising their rates for the first time in seven years. As a result, the Swedish krona rallied over one percent against the U.S. dollar.

This morning’s economic docket has mostly been ignored but a poor Philadelphia Fed reading reinforces case for a weak dollar. Last night the Senate passed a bill to keep the government funded through February and the House is expected to also pass the bill today. If President Trump signs the bill, a government shutdown will be avoided.

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EUR

The Euro seesawed during yesterday’s session. The common currency initially popped higher on good news surrounding the Italian budget. However the Euro fell modestly yesterday afternoon after the Federal Reserve hiked rates. The Euro jumped to its strongest level in six weeks against the greenback overnight. The dovish shift from the American central bank could lead the way for the Euro to recoup some of its yearly losses against the greenback. The Euro has lost nearly 5.0% year to date.

GBP

The British pound was also able to take advantage of dollar weakness overnight. The Bank of England’s Monetary Policy Committee voted unanimously to keep rates on hold at 0.75%. The widely expected move has not had much of an impact on the GBP/USD. But further sterling strength was found after Britain released better-than-expected retail sales. Sales rose 1.4% in November, which was the best result in six months.