Financial markets get ready for FOMC this evening, volatility likely
27/Jan/2016 • Currency Updates•
While the focus in the financial markets focus is now undoubtedly centred on the Federal Reserve’s interest rate decision tonight, we first look at some other developments impacting UK businesses this week.
The Pound staged a strong rally against its major peers on Tuesday, with a stabilisation in oil prices and global stock markets providing some much needed relief for investors concerned about the effect of external risks on Britain’s economy. Sterling strengthened across the board, ending higher against both the US Dollar and Euro.
A number of Bank of England rate setters, including Governor Mark Carney, spoke yesterday afternoon. On the topic of monetary policy, Carney suggested that while the notion of an interest rate cut in the UK had not been discussed, it could be a possibility if necessary. The Reuters consensus of economists now places a BoE rate hike in the fourth quarter of the year, as is our expectation.
Looking at today’s events, the Fed will almost certainly keep interest rates unchanged, with investors instead paying close attention to the accompanying monetary policy statement.
Away from the Fed, the Reserve Bank of New Zealand will be announcing its interest rate decision at 8:00pm tonight, with an outside chance of a further cut following very weak inflation data.
Major currencies in detail:
Sterling closed in on its highest level in almost two weeks against the US Dollar, having appreciated by 0.9% during the London session.
A lack of economic data meant that focus was on external factors, and the Pound was able to rally on improved developments abroad, namely oil prices and their effects on UK inflation.
Speaking alongside Carney, BoE member Forbes suggested that productivity data for the fourth quarter in the UK would likely be ‘abysmal’, although underlying trends would prove more important than the single data point.
Meanwhile, historically dovish BoE Chief Economist Andy Haldane claimed that the UK economy was continuing to grow ‘steadily’, ahead of this Thursday’s economic growth data.
Today should be a relatively quiet one in the UK, with second-tier housing data this morning likely to cause no more than moderate movements in the Pound.
A lack of major economic announcements in the Eurozone economy on Tuesday led to a second calm day of Euro trading. The single currency moved within a narrow band to finish 0.1% down versus the US Dollar.
The single currency continues to remain range-bound, with investors seemingly awaiting clues from policymakers between now and the European Central Bank’s next monetary policy meeting in March. Consensus has overwhelmingly shifted to the view that the ECB will expand its easing measures in the first half of this year, with there being a good chance that we’ll see a further cut in the central bank’s deposit rate in March.
The Eurozone’s economic calendar remains light until Friday’s inflation data, with almost all movement in the Euro today likely to hinge on tonight’s FOMC announcement. However, consumer confidence data this morning in Germany, Italy and France will be worth looking out for.
Despite gains for the currency against the safe-haven Japanese Yen and Swiss Franc amid a stabilisation in oil prices, the US Dollar ended 0.3% lower against its major peers on Tuesday.
Economic data was mostly positive in the US yesterday. Consumer confidence ticked up unexpectedly this month, with consumers apparently unnerved by the recent turmoil in financial markets. The index increased to 98.1 from 96.3, with the assessment of the labour market modestly improved on a month previous.
Housing prices continued to expand at a solid clip, rising by 0.5% in the year to November, while the service sector grew solidly this month, albeit slightly down on December by 0.6 index points to 53.7.
The Fed will dominate trading this evening. The FOMC’s interest rate decision will be announced at 7:00pm. Policymakers will likely address the recent financial market turmoil and oil price decline, crucially hinting at their possible effect on both the pace and timing of future interest rate hikes in the US. More on this in tomorrow’s post!
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