Global risk appetite got another shot in the arm after Federal Reserve Chairperson Powell and a number of senior FOMC members reaffirmed a seemingly neutral view on US policy rates. Powell pointed to muted US inflation and was backed by today’s release of unchanged core and headline CPI-inflation in December of 1.9% yoy and 2.2% yoy, respectively.
The market is now pricing the Fed to keep its policy rate unchanged at 2.25-2.50% this year and US equities are ending the week on a strong note. The S&P 500 has posted five consecutive days of gains, rallying a cumulative 6%. However, the Fed’s cautious rhetoric has continued to pressure the Dollar which in trade weighted terms has weakened to its weakest level since the last week of September.
The Euro has failed to capitalise fully on Dollar weakness due to its underperformance versus other major currencies. However, the Sterling trade weighted index is up 0.4% today and the GBP/USD cross is holding above 1.28 despite the release of weak UK macro data – GDP growth was only 0.3% in the three months to November. The real litmus test for Sterling will be Tuesday’s critical House of Commons vote on the draft EU deal. The government and parliament have provided little clarity about what will happen should the deal be voted down as most expect will be the case.
