Hawkish Federal Reserve statement suggests imminent interest rate hike
30/Jul/2015 • Currency Updates•
Sterling continued to rally for the third consecutive day this week yesterday, touching its strongest position in a month against Greenback. However, the currency finished 0.1% lower on the Dollar following a hawkish FOMC statement.
In the UK economy yesterday, mortgage approvals surpassed expectation at 66,582 in June. The monthly measure from the Bank of England, considered a leading indicator of UK housing activity, increased to its highest position since July 2008. This comes amid a large rush to remortgage property ahead of the much publicised imminent rate increase by the Bank of England, likely to take place in the first quarter of next year. Consumer credit, a measure of the amount of money borrowed in the month previous, also surpassed expectations, climbing from a revised £1.057 billion in May to £1.220 billion last month.
Today bodes to be a quiet day in the UK economy as far as economic indicator data is concerned. The Gfk measure of consumer confidence at midnight tonight the only major data point for the remainder of this week.
The single currency suffered yesterday, losing ground against both the Dollar and the Pound, despite a pickup in consumer confidence in Germany. The Euro ended the London session 0.4% lower versus the US Dollar.
Yesterday was another rather muted session in the Eurozone, with little in terms of data releases due to the holiday season. There were, however, the latest confidence indices for both Germany and France, both released before markets opened in London. Confidence in Germany increased, aiding a brief Euro rally yesterday morning. The confidence index from IFO increased in July to 108 from the 107.4 recorded in June. The reading avoided its third consecutive month of declines, helped by an agreement in Greece, and points to continued growth in the second half of the year in the Eurozone. Over in France, confidence dipped moderately from 94 to 93, slightly down on expectations of no change. Meanwhile, retail sales in Spain increased year on year, although missed expectations slightly, increasing by 2.3%.
There’s a string of economic data set for release in the Eurozone today. This will begin with Spanish growth and German unemployment, before the ECB’s economic bulletin and consumer confidence for the Eurozone in the first few hours of London trading.
The Dollar held steady versus the majority of its major counterparts in the lead up to last night’s Federal Reserve statement, with traders awaiting clues as to the timing of the next interest rate hike.
Last night the Federal Reserve gave another clear indication that higher interest rates are imminent in the US in an, as expected, rather hawkish FOMC monetary policy statement. Despite unanimously keeping rates unchanged this month, the central bank was clearly more upbeat on its assessment of the economy. The Fed confirmed rates would likely go up this year, with further hikes being gradual. It was also noted that the job market, housing, and consumer spending had all improved, while inflation is expected to gradually move towards its medium term target.
While Chair Janet Yellen did not commit to a September interest rate hike, she did reiterate the need for a continued improvement in economic data. We therefore maintain our call for a rate hike in September, although of course, this hinges on the key economic data releases continuing to perform strongly. The Dollar rallied following the announcement to end 0.5% higher versus its peers.
In terms of economic data yesterday, pending home sales, a forward looking indicator of home sales in the US, declined in June. Pending sales fell by 1.8% last month, with low inventories in many markets reducing choice and pushed prices higher. A 0.4% increase in the Northeast was more than offset by a 3% decrease in sales in the Midwest and South. Meanwhile, mortgage applications for last week accelerated, increasing by 0.8% from an almost flat reading a week previous.
The release of the latest growth figures for the US economy at 1.30pm this afternoon will be the focus of global trading today. The economy is forecast to have expanded by 2.6%, following on from the 0.2% contraction in the first quarter.
Rest of the world
Head of the Reserve Bank of New Zealand Graeme Wheeler claimed that more rate cuts in the country were likely in the coming month. The country requires additional monetary easing in order to boost growth and return CPI to its medium term target.