All eyes on the Federal Reserve ahead of possible first interest rate hike in almost a decade

Enrique Díaz-Álvarez17/Sep/2015Currency Updates

All attention in the global markets today will be on the Federal Reserve in the US, and the central bank’s interest rate announcement at 7pm BST, following its two-day monetary policy meeting. Market pricing suggests that there will be no hike. However, analysts and economists around the world are very much split 50/50. We continue to expect an interest rate hike, although the decision will almost certainly not be unanimous among the Federal Open Market Committee (FOMC) members.

The impact of a rate hike

A quarter of a percentage point hike would provide strong support for the US Dollar against almost every global currency. The possibility of an unprecedented smaller-than-expected 0.125% increase is also an outcome not to be ruled out in our opinion.

The impact of no rate hike

No hike would possibly weigh on the Dollar in the short term, although of course, this is dependent on the accompanying commentary from Chair Janet Yellen.


Sterling was given a major boost on Wednesday following an impressive labour report which saw an increase in wage growth and a decrease in the unemployment rate for July. The report will be good news for the Bank of England hawks and, in our view, puts the central bank firmly on course for an interest rate hike in February. This would, of course, provide strong support for Sterling against the majority of its major peers baring the US Dollar in the coming months.

Average earnings growth was particularly strong, accelerating to a six year high 2.9% excluding bonus’ between May and July; marginally higher than the 2.8% growth registered in the three months to June. Taking into account the rate of inflation, which yesterday was announced as flat in the UK, real earnings are now soaring well above 2%. In a further sign of a tightening labour market in the UK, unemployment also returned back to its lowest level since 2009 at 5.5%, having increased marginally in May. The rate of employment increased to 73.5% following a 42,000 increase in the number of people in work in the second quarter – its highest rate on record.

Yesterday’s strong data caused traders to bring forward their expectations for an interest rate hike in the UK, with the Pound subsequently rallying by 0.9% against the US Dollar, and by 0.7% versus the single currency. This morning’s retail sales data will be in focus, although almost all eyes will, of course, be on the FOMC.


Weak Eurozone inflation, which once again disappointed expectations at 0.1% in August, weighed on the Euro yesterday morning. Price growth that has now been stubbornly around zero for the past seven months heaps further pressure on the European Central Bank to increase its quantitative easing measures, especially after Mario Draghi earlier this month left the door open to the possibility. Comments on Wednesday from ECB Vice President Vitor Constancio suggest that the existing programme is relatively small, and can be expanded if required.

The rate of inflation in the Euro-area continues to be driven lower by declining oil prices, with the headline rate of price growth flat month-on-month. The core rate of inflation, which strips out energy prices, also surprised to the downside, increasing by just 0.9% on an annualised basis.

This weak inflation print sent the Euro lower against the Pound, although a late rally caused the single currency to end 0.7% higher versus the US Dollar for the day. The European Central Bank’s economic bulletin at 9am this morning will be worth looking out for, while construction output at 10am could cause moderate Euro volatility.


In a similar fashion to the Eurozone, inflation data in the US mostly disappointed expectations yesterday, falling by 0.1% on a month previous in August. The lack of a major shock in the CPI figure will unlikely change tonight’s FOMC decision, although will no doubt play on policymakers minds at upcoming meetings.

The headline inflation rate remained at 0.2% year-on-year, following a 4.1% decrease in gasoline prices, which registered its biggest drop since February. The real cause for concern will be the decrease in core price growth, which fell from 1.9% to 1.8%. Elsewhere, the NAHB housing market index increased from 61 to 62, although this was unable to prevent the Dollar falling by 0.1% against its basket of peers.

As mentioned before, all eyes today will be on the Fed’s interest rate decision at 7pm London time this evening. Regardless of the outcome, volatility is to be expected.



Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.