Hawkish FOMC minutes push dollar higher

Claire Hogarth21/Aug/2014Currency Updates

On Wednesday GBP initially bounced back against the EUR as two MPC members of the Bank of England voted for an immediate rise in interest rates in August. The markets had been expecting one or none. Sterling promptly rallied against the EUR and USD on this news, but the rally fizzled out in the afternoon. Nevertheless, sterling managed to end the day up against both, showing tentative signs of stabilisation and indicating that the overhang of badly positioned sterling longs is starting to clear out.

However, late in the evening the minutes of the FOMC came out and they were more hawkish than expected, dollar rallied strongly and, as of this writing, has broken through 1.3260 vs the euro and 1.66 in cable.

GBP

When Mark Carney took the reins as BOE governor in July 2013, he said the bank wouldn’t consider raising interest rates until the UK jobless rate fell below 7%, a move that could take about three years, he said at the time. In April, the unemployment rate fell below that threshold and reached 6.9%. It has since fallen even further and stood at 6.4% in June, its lowest level in six years. At the same time, strengthening in the U.K. economy has put it among the fastest-growing developed countries in the world.

On the inflation front, consumer prices in July fell to 1.6% on an annual basis, which is below the 2% inflation target of the BOE. On Wednesday, the minutes for the Bank of England meeting showed that two officials do not want to wait for wage pressures and voted for immediate hikes to the Bank rate, marking the first dissent on policy faced by Mark Carney since he took office in July 2013. More good news as British manufacturers expect output to rebound in the next three months after a sluggish second quarter, despite weakness in exports. 42% of manufacturers surveyed by the CBI said they expect output to rise in the third quarter, compared with only 11% who expect output to fall. The remainder expect output to stay the same. The GBP increased slightly versus the EUR and remained flattish versus the USD.

Today, at 09.30 local time retail sales will be released. It is expected that the yearly change in July will be 3% higher and 3.4% higher when excluding fuel prices.

EUR

Another day of second-tier reports during the sleepy August month.

Factory-gate prices in Germany fell more than expected in July as energy prices continued to depress the index, suggesting further downside risks to the inflation outlook. The producer price index decreased by 0.1% on the month and 0.8% on the year in July. This compared with forecast expectations of a flat reading on the month and a 0.7% decline on the year, according to a survey of analysts. Price pressures in the Eurozone remain at alarmingly low levels, leaving some analysts (ourselves included) pushing for more intervention from the European Central Bank. The most recent inflation data shows consumer price inflation in the currency bloc at 0.4% in annual terms, well below the ECB’s medium-term target of just below 2%. The EUR declined slightly versus the USD and the GBP.

Today is a big day. Multiple reports will be released for Germany and the Eurozone. At 08.30 Germany and at 09.00 the Eurozone will report their PMI. The consensus for Germany’s manufacturing and services PMI are 51.8 and 55.5, respectively. The PMI composite for the Eurozone is expected to be 53.4. We must note that a persistent gap has opened between these relatively optimistic surveys and the real data coming out of the Eurozone. Today we’ll see if this gap begins to close. Also, At 15.00 local time the consumer confidence report will be released. It is expected that this will continue to decline from -8.4 to -9.0.

USD

The main news in the US was the release of the FOMC minutes from the last meeting. They revealed that members had openly discussed coming rate hikes, and agreed to be more explicit about the exact timing during upcoming meetings. Needless to say, these comments were seen as hawkish and the dollar rallied in after-hours trading.

Today, The Jackson Hole Economic Policy Symposium is taking place. Although, the US has showed so far a pretty strong recovery, it is forecasted that Janet Yellen won’t show a rush to raise interest rates. The USD could surge should Yellen surprise investors by confirming US recovery and a potential sooner increase of the rates.

A few second-tier reports for the US today. First, At 13.30 local time, jobless claims will be released. The consensus for the initial jobless claims for previous week is 300,000. Second, at 14.45 local time, manufacturing PMI for August will be released. The consensus is 55.7. Finally, at 15.00 local time, a few other reports will be released such as the existing home sales. It is expected that the latter will decrease by 0.4% for July.

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Written by Claire Hogarth

Marketing Executive at Ebury. English Literature graduate from the University of York and a motivated professional.