USD focus shifts back to interest rates

Dallas Federal Reserve President Robert Kaplan’s hawkish comments yesterday gave the dollar a slight shot in the arm.

His speech focused on the recent tax cuts and his concern over the economy overheating. Although he did not mention interest rates specifically, he did say the Fed has “got some operating room for a while,” which feeds into the narrative of several rate hikes this year.

That narrative took a slight knock this morning after the number of Americans filing for unemployment benefits rose for the second consecutive week to 261,000. Many were quick to point out that the recent cold snap may well have played a part in the increase, so it is not a huge cause for concern. Nevertheless, the dollar’s slide continued after the US Producer Price Index fell 0.1% earlier today.

All eyes will be on US retail sales and inflation tomorrow, which will be closely watched as another indication of how the economy is performing and how soon the Fed may hike rates this year.

ECB keen to keep the euro from strengthening

The euro strengthened earlier this morning after the release of the accounts of the European Central Bank monetary policy meeting on Dec. 14, which hinted at a withdrawal of their bond-buying stimulus.

The release of those minutes was coupled with better-than expected industrial production from the Eurozone, which pushed the EUR/USD rate towards 1.20.

However, there is a belief among some investors that the ECB may try to talk down the euro when it holds its next monetary policy meeting on Jan. 25. A strong euro makes exporter’s goods less competitive. This is especially important to the biggest economy in the Eurozone, Germany, whose economy relies heavily on exports.

Credit no longer the flavor of the month

After several warnings from the Bank of England Chairman Mark Carney last year on household borrowing in the UK, the demand for unsecured lending was reported to have fallen significantly after the release of the BoE credit conditions survey today.

UK consumers were squeezed last year by high inflation and sluggish wage growth, with many turning to credit cards and loans to make up for the shortfall. Yet this latest reading shows that the trend is being reversed mainly down to a squeeze on the availability of unsecured debt by lenders.

Alex Fitzpatrick, The WorldFirst Team