Fed Chair Jerome Powell reiterates need for patience on rate hikes
The common currency was on course for its strongest weekly performance against the US Dollar in four months this morning, buoyed by a recent dialling back of US interest rate hike expectations.
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ince the Federal Reserve’s latest meeting in December, in which policymakers revised their interest rate projections lower and raised concerns over subdued inflationary pressure, investors have been rapidly pushing back their expectations for the timing of the next US rate hike. Expectations for additional hikes have been tempered further this week by some increasingly dovish comments from Federal Reserve members, particularly following yesterday’s speech from Fed Chair Jerome Powell.

Powell noted that he was moderately concerned that a global slowdown would worsen, while stating that there was no preset path for rates and that the Fed had room to be ‘patient’ given recent inflation data. Members Bullard and Kashkari struck a similar tone. Bullard flat out stated that the Fed should not be projecting any further rate increases and that the central bank was at the ‘end of the road’ on hikes. Kashkari, one of the most dovish voting members on the FOMC, repeated his view that he opposes additional policy tightening.

Given the aforementioned, it is clear that the Fed’s view on further policy tightening has changed dramatically in recent months. As we mentioned yesterday, we expect mostly stable policy from the Fed in 2019, the prospect of which has caused the US Dollar to shed around 2% of its value since mid-December.

UK economic data turns sour ahead of Brexit vote



News on the UK macroeconomic front was mixed this morning, with Sterling largely trading within a narrow range ahead of a crucial week in UK politics.

Friday’s GDP numbers for November were slightly better-than-expected, suggesting that the recent poor performance of the high street may not be providing as much of a drag on overall economic output as first feared. According to the monthly data, the UK economy expanded by 0.2% in November versus the 0.1% that economists had been pencilling in. That being said, growth in the three months to November slowed to its lowest level in six months, potentially a reflection of the uncertainty created by the dragging out of the Brexit process. This morning’s manufacturing and industrial production numbers also came in much lower than expected, with both sectors contracting relatively sharply year-on-year in November.

All attention now turns to Tuesday and the delayed UK government Brexit vote. This remains almost certain to end in defeat for Prime Minister Theresa May. In such an event, we think that the chances of both a general election and a second referendum would rise considerably.
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