US Dollar lower ahead of tomorrow’s Federal Reserve meeting
15/Dec/2015 • Currency Updates•
Policymakers in the US will today be commencing their two-day monetary policy meeting ahead of tomorrow’s interest rate announcement, in which the Federal Reserve is universally expected to announce an increase in its benchmark interest rate for the first time in nine years.
Despite this growing anticipation, the US Dollar dipped marginally against its major peers as markets opened for the week on Monday, with investors already looking towards the statement for clues regarding the pace of future rate hikes in 2016.
Investors appear concerned that recent increases in market volatility following the latest oil price slump could force the Fed to announce its plans to increase borrowing costs more gradually than expected by the markets next year.
These concerns, coupled with impressive industrial production data in the Eurozone and comments from President of the European Central Bank Mario Draghi, sent the Euro higher still to its strongest position against the US Dollar since the beginning of November.
Speaking in Frankfurt yesterday morning, Draghi claimed that inflation in the Eurozone would reach its 2% target “without undue delay” following the recent modest expansion in easing measures.
Focus in the currency markets today continues to be dominated by the Fed. Having said that, inflation data in the UK and US are both set for release today, and could cause moderate movement among the major currencies if not in line with expectations.
Major currencies in detail:
The Pound dipped marginally on Monday following dovish comments from a central bank member, ending 0.2% lower versus the US Dollar.
Deputy Governor of the Bank of England Minouche Shafik spoke in London on Monday, suggesting that the UK central bank will be watching the Fed closely this week, although all decision-making by policymakers will be dependent on domestic circumstances.
The Pound fell on some relatively dovish comments from Shafik, who also claimed she would “proceed with caution” when considering whether to vote for a rate increase, suggesting that there would need to be a further increase in wage growth to justify a rate hike in Britain.
From a data perspective, house prices dipped modestly this month according to Rightmove. Prices declined by 1.1% for the month, although were 7.4% up on the year previous.
The Euro’s rally continued on Monday, with the single currency 0.5% higher against the US Dollar.
Despite concerns that the relatively modest expansion in monetary easing in December would not be enough to stimulate inflation in the Eurozone, Draghi’s comments yesterday suggested that the central bank is confident that recent action will be sufficient to spur price growth. Nonetheless, he reiterated that there was no limit to which tools the ECB can use, implying that further stimulus may be on the way in the future, if required.
Earlier in the day, industrial production figures impressed, pointing to building momentum within the Euro-area economy. Output in the industrial sector rose more than expected by 0.6% in the month to October, 1.9% higher than the same time a year previous, its joint highest increase in two years.
A weak Euro and lower oil prices are clearly providing a boost for Eurozone manufacturers, with there now being a realistic chance of overall economic growth printing 0.5% in the final quarter.
Concerns on commentary from the Fed on Wednesday caused the US Dollar to dip by 0.4% against its major peers.
Monday proved to be an unusually light day of economic data in the US economy, with no major releases leading to a quiet day of trading. Unsurprisingly, all attention was instead on the Fed and there seems little in the way to derail the US central bank from announcing an increase in its interest rate by 25 basis points.
As mentioned previously, the degree of certainty for a hike meant that attention among investors has already turned to the wording in the monetary policy statement. The Fed’s dot plot, which will be released along with the statement tomorrow evening, could go a long way in mapping future rate increases, as will the number of dissenters among the committee. The central bank could opt for a “dovish hike”, which would likely limit the US Dollar’s rally following the announcement.
Receive these market updates via email