US Dollar Surges Sharply Higher After Fed Policy Announcement

Key Overnight Developments

• US Dollar Surges Sharply Higher After Fed Policy Announcement
• NZ Business and Consumer Sentiment Prove Disappointing
• Euro Drops to Three-Month Low, British Pound to Challenge 1.62

Critical Levels



The Euro sank to a three month low below 1.44 in overnight trading a broad upswing in the US Dollar (see below). The British Pound played catch-up to the single currency just ahead of the opening bell in London, accelerating lower and poised to test 1.62. We remain short EURUSD at 1.4881 and short GBPUSD at 1.6648.

Asia Session Highlights



The US Dollar surged sharply higher as Asian markets reacted to a decidedly upbeat interest rate announcement from the US Federal Reserve, setting off a wave of stop orders that pushed EURUSD below the 1.44 mark for the first time since August. Most significantly, Ben Bernanke and company said “deterioration in the labor market is abating,” which traders took as validation of the boost to priced-in Fed rate hike expectations over recent weeks. The US central bank is widely expected to look at the jobless rate as the key gauge for timing a reversal of its ultra-loose monetary stance. A Credit Suisse gauge of the priced-in yield forecast now shows the markets are betting on 89 basis points in rate hikes over the coming year, up 37 basis points or 71% since the beginning of the month. The shift in expectations was set off by sharply better outcomes for November’s nonfarm payrolls and retail sales reports.

New Zealand economic data proved disappointing. NBNZ Business Confidence fell for the second consecutive month in December, the share of firms reporting an upbeat outlook down to 38.5% from 43.4% in the previous month. Meanwhile, Westpac NZ Consumer Confidence fell for the first time in six months in the fourth quarter, although the print above the 100 midline shows that optimists still outweigh pessimists amid survey respondents polled for the report.


Euro Session: What to Expect



UK Retail Sales are set to advance for the fourth consecutive month, adding 3.7% in the year to November to register the biggest gain in 18 months. Yesterday’s drop in jobless claims, the first since February 2008, seems supportive of the outcome, hinting at a boost to incomes. However, figures from the British Retail Consortium (BRC) released last week proved discouraging as their gauge of retail activity rose just 1.8% in November after adding 3.8% in the previous month. Commenting on the release, BRC Director General Stephen Robertson struck a dour tone, saying "Consumer confidence is fragile and has taken a turn for the worse” with uncertainty over jobs, future tax increases and government spending cuts making customers more cautious. To that effect, a downside surprise in today’s outcome is not out of the question.

In Switzerland, the ZEW Survey of investor sentiment looks likely to decline for the second consecutive month in December as faltering sentiment in the Euro Zone spills over to the mountain nation. Indeed, Switzerland counts on the currency bloc for over 60% of its export demand, hinting that a rebound there has little chance of materializing without first seeing a pickup in the common market.

The economic calendar looks fairly tame, with price action likely to focus primarily on digesting the overnight moves in the US Dollar rather than scheduled event risk. On balance, this seems likely to open the door for a bit of a corrective upswing in the top anti-dollar currencies (most prominently, the Euro and Swiss Franc) against the greenback. That said, Europe has yet to react to the FOMC interest rate announcement, so an extension of the moves seen in Asia is far from off the table.

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