EUR / USD Euro-zone manufacturing PMI data was slightly higher than expected at 53.1 for December from 52.8 previously. Euro-zone inflation was revised up slightly to 0.2% from 0.1% previously while the core rate was unchanged from the flash 0.9%. US housing data was stronger than expected with starts rising to an annualised rate of 1.17mn for November while permits rose strongly to 1.29mn from 1.16mn. In contrast, the industrial data was weak with production falling 0.6% for the month and the Markit flash manufacturing PMI index also retreated to 51.3 from 52.8 with orders at the weakest level since 2009. The dollar consolidated in narrow ranges ahead of the Fed as liquidity thinned sharply ahead of widely expected volatility. There was no surprise with the US rate decision as the Fed funds rate was increased by 25 basis points to a 0.25-0.50% range, the first increase since 2006. There were no dissenters within the committee and the statement had a broadly neutral tone. The FOMC was optimistic that the labour-market would improve further and that there would be progress towards the 2.0% inflation target, but there were still underlying concerns surrounding low inflation. Forecasts suggested a further four rate increases during 2016, although the bank will remain data dependent. Yellen was also relatively neutral with remarks that the conditions for a rate increase had been met. She also commented that there was still some slack in the labour market and that rate increases would be gradual. Trading conditions were very choppy with initial dollar buying reversed quickly before a fresh round of buying as the US currency secured net gains. Overall, the statement was seen as slightly more hawkish than expected and the dollar strengthened to highs beyond 1.0850 in Asia on Thursday.
JPY The dollar consolidated around the 122.00 area ahead of the Federal Reserve decision, briefly moving higher and then recovering quickly from losses. There was an increase in benchmark US 10-year yields to above 2.30% following the Fed rate increase which supported the dollar and risk appetite held firm with rising global equity markets which curbed yen demand. Although Japan’s November adjusted trade data was better than expected in balance, exports fell at the fastest pace since December 2012 and imports also continued to decline which reinforced concerns surrounding regional trade and growth prospects. Risk conditions were still dominant and the dollar pushed to highs above 122.50 before fading slightly with the latest Bank of Japan policy decision on Friday and no policy changes expected at this point.
GBP There was mixed labour-market data with an increase in the claimant count of close to 4,000 for November after a marginal increase the previous month while unemployment fell to a fresh cyclical low of 5.2% from 5.3%. Despite evidence of an increasingly tight labour market, there was a decline in headline annual earnings growth to 2.4% from 3.0% with underlying growth at 2.0%. Given the Bank of England focus on earnings growth as a key indicator of inflationary pressures, there was further speculation that any interest rate increase would be pushed later into 2016 with little MPC support for an early increase with a first-quarter increase potentially ruled out. Sterling lost ground following the earnings data and dipped to test support below 1.50 against the dollar. There was a more decisive move below this level in choppy post-Fed trading with support close to 0.7300 against the Euro. The EU summit over the next two days will be monitored with any lack of concessions to the UK liable to undermine Sterling sentiment.
CHF The Euro dipped sharply against the franc during the European session with lows at 1.0760 before a recovery back above 1.0800 which inevitably raised fresh speculation over National Bank intervention. Risk conditions were generally favourable following the Fed announcement which curbed potential franc demand. There was an improvement in the Swiss ZEW expectations index to 16.6 for December from 0.0 previously which will underpin confidence in the outlook slightly, although global trends will tend to dominate moves as the dollar moved to the 0.9950 area.