Upbeat Yellen, impressive GDP data point to December US rate hike

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30 November 2017

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The US Dollar advanced against its major peers for the third London trading session in a row on Wednesday, although remained on course for its worst monthly performance since July.

A
n impressive set of third quarter GDP data reinforced expectations that the Federal Reserve will raise interest rates again at its next monetary policy meeting in December. The US economy grew by a stronger-than-expected 3.3% annualised in the three month to September, its highest level in three years and a somewhat faster pace than the original 3% estimate. Encouragingly, the expansion was broad based. Strong business investment and robust consumer spending ensured that the world’s largest economy withstood the effect of the September hurricanes that many feared would weigh on overall activity.

Speaking at her semiannual testimony to Congress yesterday afternoon, outgoing Chair of the Federal Reserve Janet Yellen continued to strike an optimistic tone over the health of the US economy. Yellen reiterated her support for the Fed to continue to raise interest rates gradually, welcoming recent strong growth data while acknowledging that domestic inflation could be pushed above the central bank’s 2% target in the coming months.

With markets now pricing in around a 95% chance of another Fed hike in December, anything less than a 25 basis point increase in the main rate next month would be seen as a major disappointment. The Fed’s preferred measure of inflation, the PCE index, will be released this afternoon as will the latest jobless claims and personal spending data.

Brexit divorce bill breakthrough lifts Sterling to two month high

The Pound was little changed during London trading on Wednesday, although jumped towards the 1.345 level against the US Dollar during the early hours to around its strongest position since late-September.

Sterling has risen relatively sharply in the past few sessions after it was reported that the UK had offered a large divorce bill worth up to £44 billion to the European Union. The market continued to react in a positive fashion to the news that the UK and EU may be close to a deal on the Brexit divorce bill. While nothing is official at this time, a confirmation of the breakthrough would be a significant achievement for Prime Minister Theresa May and could act as catalyst to push the Pound towards September’s fifteen month highs.

BoE Governor Mark Carney added nothing new on monetary policy during his appearance yesterday. House price data from Nationwide is unlikely to rock the boat today and Sterling is likely to continue to be driven by Brexit developments.

German inflation picks up pace from four month low

In a relatively hectic day of economic data releases yesterday, the latest set of German inflation numbers beat expectations, lifting the Euro off its lowest level in a week. Headline inflation in Europe’s largest economy accelerated to 1.8% YoY in November, rising off October’s four month lows and boding well for this morning’s Euro-wide CPI numbers.

Aside from this morning’s inflation data, the latest Eurozone unemployment figure will also be released at 10:00 UK time. Spanish third quarter GDP data and German retail sales could also shift the Euro this morning.