FOMC’s Mind Made Up?
Morning mid-market rates – The majors
March 13th: Highlights
- Rate hike now “inevitable”
- EU considering hike?
- Dollar falls as Euro makes ground
- Sterling falls against majors
Buying rumour, selling fact…again
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Markets mulling over data
The Pound fell against the stronger Euro which gained by close to 1% trading close to .8780.
A rate hike is now inevitable in the U.S. as the “conditions precedent” for a hike, as laid out by Janet Yellen, have all been met. It is almost inconceivable that a hike won’t happen when the FOMC meet on Tuesday and Wednesday.
I’m the U.K., the Monetary Policy Committee will also meet this week to decide interest rates. Traders will watch the vote, which has been 9-0 since the last hike in rates, but it is possible that there could be at least one dissenting voice following the recent Quarterly Inflation Report.
In his Budget this week, the Chancellor of the Exchequer lowered the “official” forecast for inflation to 2.7% but was a little more bullish on growth, seeing GDP at 2% in 2017.
Sterling falls against stronger Euro and Dollar
Concerns over a two-speed Europe were voiced at the Ecofin meeting yesterday by the Polish Prime Minister and perfectly illustrated the issue with a “one size fits all” monetary policy.
Interest rates remain benign for low risk economies
This week the Swiss National Bank and Bank of Japan meet to determine interest rate policy. When the Swiss removed the pegging of their currency to the Euro a couple of years ago, it immediately rose by close to 25%. It has since traded in a relatively narrow range. Clearly the drop against the euro to 0.9000 from 1.20 was overdone and since depegging it has traded between 1.0230 and 1.0750. The SNB will likely continue with negative interest rates this week.
The Bank of Japan has been “fiddling” with monetary policy as long as anyone involved in the market can remember. Huge stimulus has been added to the domestic market to spur growth but the peculiarities of the Japanese economy which is the world’s fourth largest continue to defy their efforts.
The JPY remains quite volatile reacting more to events in the United States than a number of other major currencies. This is due to the close economic, strategic and military links the two countries have forged over the past fifty years.
This week’s events of note
- ECB President speech – Given the remarks following yesterday’s council meeting a more hawkish tone is possible.
- Eurozone Industrial Production – A rise from January’s especially weak data is expected.
- U.S. Producer Prices – A smaller increase is likely given the strength of the dollar.
- Japanese Industrial Production – Strong economy belies the lack of inflation.
- Dutch General Election Result – Watch for Populist/Nationalist backlash.
- U.S. Retail Sales – A benchmark for consumer confidence. Expected slightly lower than January.
- U.S. Inflation data – Too late to influence the FOMC but expected to rise to 2.5% YoY.
- FOMC Rate Decision, Report on Economic Outlook and Press Conference – A hike 90% priced in. Recent data supports tighter monetary policy. Expect guidance on next hike.
- Australian Employment Report – Unchanged at 5.7% likely.
- BoJ, Rate Decision – No change but traders will listen carefully to press conference for changes in official language.
- SNB Rate Decision – Swiss retain negative interest rates to stave off currency strength. No change expected.
- Bank of England Rate Decision – voting result and minutes. No change expected but possible there will be one or two votes for a hike. Carney will be pressed on inflation following Chancellor’s budget comment.
- U.S. Industrial Production and Capacity Utilization – What did the FOMC know in advance? Was the hike justified?
Have a great day!
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”