Hawkish Federal Reserve commentary lifts Dollar
28/Sep/2015 • Currency Updates•
In the absence of market-moving macroeconomic releases, markets were focused on communications from the world’s major central banks.
Federal Reserve Chair Yellen surprised markets with a hawkish clarification of the previous week’s statement. President Draghi, for his part, sent mixed messages, signalling that the ECB is concerned by the downside risks and carefully watching the currency, but is not ready to expand QE quite yet. As a result, the Euro gave up all of its post-FOMC gains and is now solidly below its pre-meeting levels, while Sterling weakened even further on dovish MPC commentary and lost ground against every G10 currency save the Norwegian Kroner.
Last week was extremely light on relevant macroeconomic data. Currency markets focused mainly on comments by MPC members Broadbent and Cunliffe. These turned out to be cautious and not particularly enlightening.
We are sticking to our call for a February interest rate hike. We will however be looking very carefully at the November vote result. We expect there to be further dissenters calling for an immediate hike. Absent this, we will revise our outlook and push back our hike timetable, as well as reduce our forecasts for Sterling against all major currencies.
Euro area leading indicators were largely unchanged in September.
The key composite PMI business sentiment number fell marginally, and remains at a level that historically has been consistent with 2% economic growth – though lately the PMI has tended to somewhat overestimate actual economic outcomes. The Volkswagen emissions cheating scandal does provide some downside risk to the German economy: the auto industry is responsible for almost a fifth of German exports, so any sustained world market share loss by German automakers would have noticeable effects in the German economy.
On the political front, the Catalan elections opened the fall season of political risks for the common currency. Catalan separatists failed to achieve 50% of the vote but will enjoy an absolute majority in the regional Parliament thanks to quirks in the electoral system; they have indicated that this result will be enough for them to issue a declaration of independence.
We continue to think that political risks in the Eurozone will outweigh economic ones for the foreseeable future.
Last week’s reports out of the US were largely reassuring.
Second quarter GDP was revised upwards again to 3.9%, housing market indicators maintained their solid tone and weekly jobless claims continue to hover near multi-decade lows. This spate of Dollar-positive data was reinforced by Federal Reserve Chair Yellen’s quite hawkish speech on September 24th. She explicitly stated that the majority of FOMC members expect to hike interest rates before the end of the year, and that both the October and the December meeting are open for this first hike.
We maintain our call for a US interest rate hike in either October or December, with roughly a 50-50 chance for each meeting, and therefore a continued strengthening of the Dollar against major G10 currencies.