FX Focus: Dollar declines despite Fed's hint that rate hike will come 'fairly soon'

The dollar was on the back foot against its main rivals on Thursday (23 February), with investors failing to get excited by comments from the US Federal Reserve which indicated an increase in interest rates will come sooner rather than later.

Broadly flat against the euro, the greenback declined 0.13% and 0.20% against the Swiss franc and the Canadian dollar, trading at CHF1.0090 and CAD$1.3138 respectively and lost 0.17% against the yen to ¥113.12.

The minutes of the Fed's latest policy meeting, which were released on Wednesday night, showed that many of its policymakers are in favour of raising rates again "fairly soon" provided data on jobs and inflation data come in line with expectations.

While voting to keep rates unchanged currently, the minutes also showed a level of uncertainty at the Fed amid lack of clarity on the new economic policy of US President Donald Trump.

Fed chair Janet Yellen had said recently that it would be unwise to wait too long to raise interest rates, indicating an increase in the summer.

"With the Trump uncertainty still a major theme and concerns continue to heighten over how his policies may impact the US economic outlook, the central bank may be encouraged to maintain a cautious stance till the second quarter of 2017," said FXTM research analyst Lukman Otunuga.

"While there continues to be discussions of the growing chorus of hawkish Fed officials opening the doors for a March hike, it seems unlikely that rates will be hiked in March with June looking more possible."

Michael Hewson, chief market analyst at CMC Markets, added that the minutes from the January meeting were unlikely to add anything new to what was already known.

"It would appear that while investors had priced out the prospect of a move on rates in March the Fed, not unreasonably wanted to keep the markets guessing, and none of the recent comments by Fed policymakers have suggested that still isn't the case," he said.

"It was always likely that the Fed would want to keep its policy options open, fiscal policy uncertainties notwithstanding."

Over in Britain, the pound edged higher against both the dollar and the euro, gaining 0.25% and 0.13% to trade at $1.2484 and €1.1817 respectively. Sterling had climbed above €1.19 for the first time in 2017 in the previous session, following news the UK economy grew more than expected in the fourth quarter of last year, but retail data released on Thursday was less upbeat.

According to the Confederation for British Industry, 40% of retailers recorded a rise in sales volumes in February compared to 12 months ago, while 31% saw them fall, giving the gauge a total balance of +9%, up from an 8% decline in January.

However, the report added a majority of retailers expect business conditions to deteriorate over the next quarter, making it the worst reading in four years.

"Given the likelihood that households' real incomes will stagnate this year in response to high inflation, more austerity and meagre job gains, we think retailers are right to be pessimistic about the outlook for consumer spending this year," said Samuel Tombs, chief UK economist at Pantheon Macroeconomics.