Sterling Struggles to Break Out
The dollar lost ground initially against the pound after the Fed reported that they have decided to taper bond purchases by 10 billion dollars a month. Stronger than expected retail sales data in the UK failed to lift Cable, which is testing its 2013 highs. The Fed announced that starting in January they would reduce purchases of Agency bonds by 5 billion a month and Treasury securities by 5 billion per month.
The UK reported largely as expected November retail sales. The 0.3% rise in the headline rate was in line with the consensus, but the October series was revised down to -0.9% from -0.7%. Excluding autos, retail sales rose 0.4%, slightly stronger than expected.
The Fed’s dovish tone touched on the high relative unemployment rate which currently stands at 7%, which the Fed stated could fall well below its target of 6.5% before tightening of monetary policy takes place. The Fed also touched on the low levels of inflation which could present a problem if stimulus is removed from the system. The Fed’s target for inflation is 2%, and the year on year PCE is currently standing near 1.1%.
Yield differentials between the US and UK 10-year notes remained nearly unchanged after the Fed meeting. US bonds sold off initially but climbed back to nearly unchanged as riskier assets continued to rally.
Sterling is creating an inside day after moving higher against the greenback on Wednesday after the Federal Reserve announcement. Momentum on the currency pair is poised to generate a buy signal as the MACD (moving average convergence divergence) index is about to experience a crossover. The Relative strength index (RSI) is printing near the 58 level which is on the upper end of the neutral range.
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