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Hawkish Fed Minutes Bolster US Dollar (USD) Demand, Pound (GBP) Extended Rally on Strong Retail Sales

Published: 19 May at 4 PM Tags: Euro, Dollar, Pound Sterling, America, UK, Eurozone, Australian Dollar, New Zealand Dollar, Canadian Dollar, Australia, New Zealand, USA, Canada,

Pound Sterling
After rallying strongly on an IPSOS MORI poll that gave the ‘Remain’ campaign a strong lead the Pound continued to extend gains on Thursday. This bullishness was fuelled by stronger-than-expected UK Retail Sales figures, as the sector posted growth of 4.3% on the year in April. As consumer spending had evidently increased this eased concerns over the potential negative impact of referendum uncertainty on domestic confidence. Nevertheless, as ‘Brexit’ volatility is likely to resume Sterling is expected to be driven lower in the near future by profit taking.

Sentiment towards the single currency was dented by the strength of the US Dollar on Thursday morning, as markets showed increasing concern over the possibility of further policy divergence between the Fed and the European Central Bank (ECB). Some confidence was restored to the Euro later in the day, however, after the account of the ECB’s April meeting suggested that policymakers are unlikely to ease policy further in the near term.

US Dollar
Demand for the ‘Greenback’ surged in the wake of the Federal Open Market Committee’s (FOMC) April meeting minutes, which proved more hawkish than investors had expected. With the possibility of a June interest rate hike rising sharply the US Dollar strengthened against many of the majors. However, some of this bullishness was lost during the afternoon as the latest Philadelphia Fed Index proved weaker-than-expected, reigniting concerns over the domestic manufacturing sector.

Australian Dollar
While the Australian Unemployment Rate did not rise as forecast, instead holding steady at 5.7%, this was not enough to particularly shore up the softened ‘Aussie’. The commodity-correlated currency took a severe blow from the hawkishness of the Fed, with the odds of another Reserve Bank of Australia (RBA) rate cut also increased. With the outlook of the domestic economy less than encouraging there is little reason to favour the antipodean currency at present.

New Zealand Dollar
The heightened odds of an imminent Fed rate hike weighed on the ‘Kiwi’, with risk appetite diminished as markets scrambled to re-price the likelihood of a June rate move. Demand for the New Zealand Dollar was also weakened by the ANZ Consumer Confidence Index, which dipped from 120 to 116.2 in May as downside pressure weighed on sentiment. If tomorrow’s Credit Card Spending shows greater levels of confidence the ‘Kiwi’ could still strengthen ahead of the weekend.

Canadian Dollar
Oil prices fell back after the Fed’s minutes, with Brent crude trending below US$48 once again due to weaker commodity demand. Canadian Wholesale Sales also disappointed, clocking in at -1.0% rather than -0.5%, as the domestic economy continued to demonstrate signs of slowing. However, with expectations pointing towards a strong uptick in the latest inflation data the ‘Loonie’ is likely to see some renewed strength on Friday.
As of Thursday, 19th May 2016, the Pound Sterling currency rates mentioned within this news item were as follows:

GBP EUR exchange rate was 1.3037, GBP USD exchange rate was 1.4605, GBP AUD exchange rate was 2.0203, GBP NZD exchange rate was 2.1627, and GBP CAD exchange rate was 1.9115.
Dominic Lee About Author: (474 Posts)With over ten years experience as an economist – including four years spent as a chief economist with a major currency broker – Dominic has acquired a wealth of knowledge which he uses to forecast market movements. Dominic now works as an independent business advisor and writes for several financial publications.

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