Federal Reserve leave rates on hold and don’t extend bond purchases

The release of better than expected US retail sales data for November managed to stem the slide in the US Dollar yesterday after Moody's comments about the US's AAA rating and the tax cuts saw an agressive drive towards selling US dollars. 

The Federal Reserve's decision to continue with the bond purchase program (the US eqivalent to quantitative easing) agreed at the last meeting without any changes also helped support the slightly stronger Dollar sentiment, disappointing those who thought the Federal Reserve might step up or increase their program.

There were no surprises in the statement with Thomas Hoenig still dissenting and the Fed expressing the concerns about unemployment and the low levels of inflation as they did last month. In any case most of the Dollar recovery had more or less happened before last nights decision, as events in Europe continued to weigh more heavily on the euro's recent resurgence.

Ratings agency Standard and Poors decision to downgrade Belgium to a negative outlook was part of the reason for the Euro struggling again this morning as was the very narrow vote of confidence received by Italian Prime Minister Silvio Berlusconi in yesterday's no confidence vote in Rome, which resulted in the outbreak of violence in the streets. This morning's decision by Moodys to put Spain's Aa1 rating on review for a possible downgrade also hit sentiment and as such keeps the fiscal focus on Europe.

Whilst concern remain over Europe's ability to deal with its massive fiscal problems the Euro will continue to be pushed and pulled as sentiment ebbs and flows from risk on to risk off the Euro will continue to feel the pressure.

In the UK CPI inflation continued to rise coming in at 3.3%, above expectations on the back of firmer food and commodity prices, and the likelihood is starting to dawn that it will stay high for some time, making life a little uncomfortable for the Bank of England monetary policy committee. It remains quite likely that further QE is now off the table for the foreseeable future, even though risks remain to growth.

This afternoon US CPI data for November will be a key test with expectations of a year on year rise of 1.1%, slightly down from last months 1.2%. Empire manufacturing and industrial production figures are also due out, as markets look for the recent slow improvements in both measures to continue.