The Federal Reserve’s monetary policy announced failed to stem the dollar’s slide. The greenback traded lower against most of the major currencies with the only exceptions being the Canadian dollar and Swiss Franc, which rallied on the back of short-covering. On balance, the outcome of the FOMC meeting was less dovish. The central bank left interest rates unchanged, dialed up their expectations for growth, and put some specific numbers around their Treasury and mortgage-backed securities purchases. They didn’t extend the maturity of asset purchases which was widely anticipated and the decision to be less aggressive is supported by Fed Chairman Powell’s view that the economy should perform strongly in the second half of 2021 thanks to the vaccine. The greenback jumped in response but the rally lost its sizzle when he made it clear that they will continue buying bonds until there is substantial progress made on their goals. They will also give ample warning before tapering bond purchases and if needed, have the flexibility to provide more accommodation. The main takeaway is that while the Fed has been swayed by vaccine optimism, it will be a long time before they act on those views and start to unwind stimulus – hence the continuation of dollar weakness.

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Meanwhile, consumer spending was significantly weaker than expected, falling -1.1% in November. Spending in October was revised lower as well, putting retail sales down slightly versus the small increase previously reported. Restaurants, department stores, and car dealerships suffered the most but purchases of clothing and furniture also fell. Online spending was strong but not strong enough to offset weakness elsewhere. Between rising jobless claims, surging virus cases, and new restrictions that limited mobility last month, US shoppers are spending less. According to a survey by the National Retail Federation and Prosper Insights & Analytics, Americans spent 14% less on holiday purchases between Black Friday and Cyber Monday this year compared to last. Unfortunately, less spending on holiday gifts is trend that is a likely to persist into December posing a big problem for fourth-quarter growth. Widespread vaccine distribution is on its way but until that happens the possibility of more economic pain explains the Fed’s cautiousness today.

With that said, Republicans and Democrats are talking about progress being made on stimulus talk. This plan should include direct payments (up to $600 per person), 16 weeks of $300 extra unemployment benefits, and more PPP grants. House Democrats have been advised to stay in DC until relief deal is reached, another sign that it could happen soon. Stocks should have responded more positively to these developments and if/when an agreement is reached, we expect a more significant rally in equities that will carry over to currencies.

Euro and sterling rose to fresh 2.5 year highs on the back of dollar weakness and stronger PMIs. Eurozone data was unambiguously positive with manufacturing and services activity improving in the month of December. Between all recent reports, the evidence is now clear that recent lockdowns did not take a big a toll on the economy. Manufacturing, in particular, seems to be doing well but improvements have also been seen in services.

The UK reported faster manufacturing growth but service sector activity continued to contract despite expectations for a mild expansion. Nonetheless sterling is up as the UK signs a custom trade agreement with the US. Investors haven’t given up hope for a Brexit deal after European Commission President Ursula von der Leyen said “there is a path to an agreement now,” suggesting that a deal could be made in the next few days. In the meantime, the main focus will be on tomorrow’s Bank of England meeting. No one expects monetary policy to be changed but the central bank will probably indicate that they are ready to provide more stimulus if there’s Brexit disruption. We would not be surprised by a muted reaction to BoE.

The Australian dollar held steady while Canadian and New Zealand dollars traded lower. No data was released from Australia on Wednesday but Canada reported an uptick in consumer prices. Dairy prices in New Zealand grew at a slower pace. Third-quarter GDP numbers are due from New Zealand tonight and a strong recovery is expected. New Zealand was one of the first major countries to report zero local transmissions and early reopening should have paved the way for a sharp rebound in Q3 GDP growth.