Dollar Higher On Inflation Expectations

The dollar rose on Wednesday after doveish commentary form the Fed and rising speculation ahead of the ECB and BoE rate meetings tomorrow. Although expectations of further central bank policy easing on Thursday remained quite low, there was a general feeling more might be introduced sometime in Q1.

Richmond Fed's Lacker warned that the Fed's monetary policy stance ran the risk of increasing inflation and he recommended it cease its purchase of mortgage backed securities because they “disadvantage other classes or borrowers” and purchase instead long-dated Treasuries. On the data front MBA Mortgage Applications rose by 11.7% from -10.4% previously.

EUR
The euro traded mixed on Wednesday as speculation ahead of the ECB rate meeting weighed on risk appetite. The possibility that the central bank might increase QE in the near future rose after recent unemployment data showed a rise of a basis point in December, and the single currency fell back on concerns that President Mario Draghi could talk up the possibility of a future rate cut at the post-meeting press-conference.

On the data front, German Industrial Production came out as expected at -2.9% compared to -3.0% previously; month-on-month, meanwhile, it rose to 0.2% from -2.0% when a rise to 1.0% had been expected.

GBP
The pound fell on Wednesday after disappointing retail data and a widening trade deficit added to the existing run of poor data. This raised the previously unthinkable possibility of an easing in monetary policy at Thursday's BoE rate meeting, although, overall the likelihood of such an announcement was still seen as very small. Nevertheless it was seen as possible in Q1.

The British Retail Consortium's Shop Price Index y/y in December, remained at 1.5% when it had been expected to rise to 1.7%. This backed up Tuesday's BRC data which showed retailer's Christmas sales barely rose. Other data showed a lower then expected drop in the Trade deficit to 9.16bn pounds from 9.49bn when a fall to 9.0bn had been the consensus estimate, all adding up to a bad day for the pound.

JPY
The yen fell on Wednesday after heightening speculation of increased monetary easing form the BoJ pushed down the value of the currency. Pressure came from reports that the central bank was in meetings with the government to discuss “macroeconomic issues”, which was taken as meaning the possibility of more stimulus. BoJ's Shirakawa was tellingly evasive when asked about the content of the meeting but Chief Cabinet Officer Yosihide Suga was more clear saying the next BoJ government was committed to bold monetary easing policies and would intentionally weaken the yen. It was reported that the BoJ might deliver more easing at its Jan. 21-22 meeting and possibly double the inflation target from 1% to 2%.

Some analysts are calling for a temporary bottom in the yen, however, as they claim easing expectations have now been fully priced in and something much more extreme such as unlimited asset purchases would be required for deeper falls.