Friday’s Major FX Outlook

EUR/USD
The euro edged lower against the dollar on Thursday as markets digested the Federal Reserve's decision to cut its USD85 billion in monthly bond purchases by USD10 billion beginning January, which could open the door to a longer-term strengthening trend for the greenback. Fed bond purchases tend to weaken the dollar by driving down long-term interest rates that send investors to assets like stocks to encourage investing and hiring. The U.S. central bank reiterated that interest rates are likely to remain low even after the unemployment rate drops below 6.5%, the threshold at which the Fed has previously said it would start to consider rate increases. Meanwhile, less-than-stellar economic indicators in the U.S. watered down the greenback's gains. The Federal Reserve Bank of Philadelphia said that its manufacturing index jumped to 7.0 for December from November’s 6.5 reading, though analysts were expecting the index to rise to 10.0 this month.
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GBP/USD
The pound slumped against the dollar on Thursday as investors snapped up greenback positions in wake of the Federal Reserve's Wednesday decision to trim its USD85 billion in monthly bond purchases by USD10 billion in January. On Wednesday, the Fed announced that it would reduce its USD85 billion-a-month bond-buying program by USD10 billion in January now that the economy is improving, which boosted the greenback against most major currencies. Fed bond purchases tend to weaken the dollar by driving down long-term interest rates that send investors to assets like stocks to encourage investing and hiring. Meanwhile in the U.K., the Office for National Statistics reported earlier that retail sales increased by 0.3% last month, matching forecasts. Retail sales were 2% higher on a year-over-year basis, the ONS said, undershooting expectations for a 2.3% gain, after rising at an annual rate of 1.8% in October. Demand for the pound remained supported after data on Wednesday showed that the U.K. unemployment rate unexpectedly fell to a four-and-a-half year low of 7.4% in the three months to October, fuelling hopes that the Bank of England will raise interest rates ahead of other central banks.
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USD/JPY
The yen was slightly weaker against the dollar on Friday ahead of the Bank of Japan's latest review of monetary policy expected to stand pat on its monetary base policy target and keep the pace of asset purchases steady. Overnight, the dollar advanced against most major currencies after the Federal Reserve said it was trimming its USD85 billion monthly bond-buying program by USD10 billion next month, though lackluster economic indicators watered down the greenback's gains. Fed bond purchases tend to weaken the dollar by driving down long-term interest rates that send investors to assets like stocks to encourage investing and hiring. The U.S. central bank reiterated that interest rates are likely to remain low even after the unemployment rate drops below 6.5%, the threshold at which the Fed has previously said it would start to consider rate increases. Meanwhile, less-than-stellar economic indicators in the U.S. watered down the greenback's gains.
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USD/CAD
The U.S. dollar pulled back from three-and-a-half year highs against the Canadian dollar on Thursday after data showed that U.S. jobless claims rose to the highest level since March. The U.S. dollar trimmed gains after official data on Thursday showed that initial jobless claims rose to a nine month high last week, sparking concerns over the recovery in the labor market. The number of people claiming unemployment assistance in the week ending December 14 increased by 10,000 to a seasonally adjusted 379,000 the Labor Department said. Analysts had expected U.S. jobless claims to fall by 35,000 to 334,000 last week from the previous week’s revised total of 369,000. The data came one day after the Federal Reserve announced that it would reduce its USD85 billion-a-month bond buying program by USD10 billion in January. In his last press conference as Fed Chairman Ben Bernanke said the economy was continuing to make progress. The U.S. central bank reiterated that interest rates are likely to remain low even after the unemployment rate drops below 6.5%, the threshold at which the Fed has previously said it would start to consider rate increases.
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