FOMC keeps US interest rates unchanged, Dollar down slightly

Enrique Díaz-Álvarez16/Jun/2016Currency Updates

As universally expected, the Federal Reserve kept US interest rates unchanged at its June meeting last night. The famous ‘dot plot’, which measures Federal Open Market Committee members’ expectations for future rate hikes, still shows two more expected rate hikes for this year. However, longer-term rate hike expectations have come down.

The US Dollar dropped following the announcement, by just under 0.5%. The Fed’s relatively confident economic assessment prevented the Dollar from dropping more than it did. Significantly, the Dollar then went on to rally over the next 24 hours, although there were no further updates. This is a sign that market expectations for the FOMC statement and ‘dot plot’ must have been considerably more dovish than the actual outcome.

The EU referendum remains the dominant factor in the currency markets. Yesterday´s UK labour market report was quite upbeat, but it did little to distract markets from the latest Brexit polls.

Attention today temporarily shifted away from the referendum as the Bank of England announced its interest rate decision. As expected, interest rates remain unchanged in the UK ahead of next week’s EU referendum. The BoE reiterated that the possibility of a Brexit remains by far the biggest event risk.

Financial markets have continued to push back expectations for the next UK interest rate hike. However, we expect that a vote to ‘remain’ should cause investors to bring forward these expectations, and allow policymakers in the UK to increase rates for the first time since the financial crisis in the final quarter of the year.

Of note is that as the referendum date draws closer, the US Dollar has reclaimed its status as a safe-haven currency.

In other news, the Swiss National Bank announced no changes in monetary policy this morning. Interest rates remain in negative territory. Policymakers reiterated that the Swiss Franc was still ‘significantly overvalued’.

Major currencies in detail:


Sterling ended the London session 0.5% up against the US Dollar yesterday after bookmakers adjusted their odds of a Brexit result from the record highs the previous day. Our favourite indicator, the Number Cruncher aggregator of polls, now puts the likelihood of a Brexit at 39%.

Claimant Count Change in May decreased significantly, by -0.4k, compared to a 6.4k increase in April. The Average Earnings Index for April (including bonus payments) rose by a higher-than-expected 2%.

In the three months to April, unemployment dropped to 5% from 5.1%. If, as we still expect, Britain remains in the EU, those positive numbers are what the Bank of England needs to see before considering rate increases. The upward surprise in earnings growth figures will be of particular importance for the BoE.


The main figure out today, the Trade Balance for April, was better than the expected €26 billion, coming in at €27.5 billion. The single currency appreciated against the US Dollar and ended the London session 0.3% up.

The latest inflation figures for May remained mostly intact. CPI (year on year) is negative, at -0.1%. The Euro has been under pressure today and looks set to remain highly volatile in the lead-up to 23 June.


The Fed left rates unchanged, as expected. Short-term economic projections were tweaked slightly, while longer-term predictions were left largely unchanged from the April meeting.

Fed Chair Janet Yellen struck a modestly optimistic tone and suggested that a July hike would still very much be a possibility.

In other economic news, industrial output and manufacturing production decreased by 0.4% in May. The Producer Price Index recorded a 0.4% increase.


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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.