27 Sep 2018: Fed to carry on hiking

Fed to carry on hiking

September 27th: Highlights

  • Another hike this year, three in 2019 and one in 2020
  • Sterling in a state of flux
  • Draghi making monetary union his final quest

Powell sees three more years of growth

The era of advance guidance took another step forward yesterday as the Chairman of the Federal reserve Jerome Powell followed up the announcement of a rate hike with his forecast for 2019 and into 2020.

Powell sees three more years of solid growth in the current economic cycle and predicted three more hikes in 2019, following one more in December of this year, and one hike in 2020.

This means that short-term rates will likely “top out” at 3.5% and the rest of G7 will play catch up. This applies in particular to the UK which is seemingly in tightening mode but that could all change as Brexit talks flounder. Additionally, this applies to the Eurozone where rate hikes are likely to begin in a years’ time.

The dollar firmed following Powell’s press conference but given all that he said about the outlook for the rest of this year, this was “priced in,” and the effect was muted.

The market is far more concerned about the prospects for an escalation of the growing unrest over trade between the US and China and the fact that President Trump seemingly turned his sights on Japan, a staunch U.S. ally, in the past few days.

The dollar index reached a high of 94.40, closing at 94.30. It has drifted lower overnight as the market digested the rate outlook and long-term rates fell.

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Sterling waiting for the next step in Brexit negotiations

When Theresa May announced the date on which the UK would finally leave the EU, March 29 next year, she said that the decks would be cleared, and Brexit would be all-consuming for the Government’s introduction of new legislation through Parliament.

However, even she is likely surprised at how this incredibly important move has taken over every facet of political, financial, and economic life. It is most noticeable at times, like this week, when there are only behind the scenes negotiations taking place and traders, commentators, and those affected by the turmoil Brexit is causing await the next installment.

It is even more incredible that despite the setbacks that have been seen culminating in the Salzburg talks last week that traders are still prepared to have faith, to a certain extent, in a deal being done eventually.

Following a period of “sabre rattling” where the phrase “no deal better than a bad deal” was coined, we now seem to be reaching a point where both sides see the incredible difficulty a no deal Brexit will bring.

So, we are now in a period where neither side wants to compromise but both know they must. It remains to be seen where the compromises will come and if the UK Government can survive doing “what needs to be done”.

Following its fall after last week’s events, the pound has managed to claw its way back above 1.3100 versus the dollar and is clinging on as other events pass it by.

Yesterday, it traded in a 1.3218/1.3138 range eventually closing a little lower overall on the day at 1.3166.

Feelings, Nothing more than feelings

The very best FX traders seem to have a knack for reading the market and understanding its psyche when making trading decisions. They are not bound by economic developments and technical analysis but are able to “read” what is going to happen.

Such a feeling seems to be pervading the market now regarding the single currency. As we drift towards the end of the quarter, the euro is starting to make “higher lows”. This is a sign that a rally is looming as less downside is being tolerated before buyers step in.

The 1.1820 level now appears to be pivotal and if that point can be conclusively breached, the single currency can rally back towards 1.2000 and Mario Draghi’s concerns about rising inflation will be allayed.

Sr. Draghi is speaking again today and despite his words being tempered by his colleague, Peter Praet, the ECB’s Chief economist, his speech the other day, where he appeared as hawkish as he ever has, resonated through the market. He is unlikely to return to his previous stance immediately, so the market will be interested in what he has to say later.

His speech will follow the release of the ECB’s economic review, but he may be more concerned about talking about his desire to see closer monetary and fiscal union in place to provide support to both the strongest and weakest parts of the economy.

He wants the “wealthier” nations of the Eurozone to “club together” to create a fund that will “backstop” any too big to fail bank that gets into trouble and aid when a country’s debt problems are exacerbated by market actions that are no fault of its own. It will not, however, help countries whose lending practices fail to comply with ECB norms, as in the case of Greece and Cyprus.

The single currency had a quiet day yesterday, reaching a high of 1.1798 and closing at 1.1740.

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.”