US markets surge as the Federal Reserve edges towards an interest rate hike

Enrique Díaz-Álvarez18/Dec/2014Currency Updates

GBP

Much like most other major currencies, the Pound fell against the Dollar after the Federal Reserve’s monetary policy statement yesterday evening, plummeting by 0.9% against the greenback and touching its weakest position in 15 months.

The Bank of England remained split at 7-2 in December on whether to hike UK interest rates despite inflation falling to a twelve year low in November. Ian McCafferty and Martin Weale again voted for a 25 basis point hike for the fifth consecutive month, while quantitative easing remains at £375 billion. Minutes of the meeting reiterated Mark Carney’s words on Tuesday, highlighting that the sharp fall in oil prices should stimulate growth in the UK and its main trading partners.

Wage growth in the UK accelerated in October, rising above expectations to 1.6%, well above inflation. Average earnings including bonuses also rose to 1.4%, marking the first time in six years that the two measures had both risen above the inflation rate. Encouragingly, the number of people in unemployment fell by 63,000 in the quarter to 1.96 million with the unemployment rate remaining at its six year low of 6%.

Likely to cause the most volatility for the UK currency today will be retail sales data at 9:30am this morning.

EUR

A similar story for the single currency on Wednesday as the Euro fell by an entire percentage point after the Fed’s statement.

Earlier in the day, and as expected, it was announced by Eurostat that inflation in the Eurozone slowed to a meagre 0.3% in November. This represents the joint lowest inflation reading since late 2009 after prices fell by 0.2% last month, increasing pressure on the ECB to take more forceful action in the New Year as the Eurozone edges closer and closer to deflation. The core CPI, which excludes volatile components such as food and energy, remained at 0.7% YoY in November.

Mostly second tier releases in the Eurozone today, with market focus on IFO Business Conditions at 9am GMT.

USD

The Dollar advanced against its major peers before and after the Federal Reserve’s hawkish statement, appreciating versus almost all other G10 currencies. The US Dollar index finished the day 0.9% up.

The effect of lower oil prices now appears to have spread to the world’s largest economy. Dragged down by cheaper oil, US inflation fell to 1.3% YoY in November having fallen by 0.3% on October. Energy costs tumbled 3.8% last month, with gasoline prices declining by almost 7%, causing the Consumer Price index to reach its lowest level since February. The core CPI climbed 0.1% in November although fell slightly on an annualised basis from 1.8% to 1.7%. This unexpected fall in inflation could provide ammunition to those dovish members of the Federal Reserve, with price growth now well below the 2% target.

The main market mover, however, came from the Federal Reserve monetary policy statement. The FOMC statement sent an unmistakable signal that higher rates are coming in 2015. As we has expected, the words “considerable time”, describing the period between the end of additional QE and the beginning of rate hikes, was dropped. Reactions in financial markets were mixed. This suggests the Fed is not particularly concerned about recent market turmoil or Dollar strength. The Dollar soared in response, but equities also rose as there were some dovish aspects to the FOMC meeting: expectations for the pace of hikes moderated among FOMC members, and expectations for future inflation were reduced somewhat.

Fallout from the Federal Reserve statement will likely drive Dollar movement for most of the day, although PMI data at 2:45pm is also worth noting.

Rest of the world

Russia’s Ruble stabilised on Wednesday, ending a seven day fall as the government sold Dollars and the central bank stated it would help companies meet foreign-currency debt obligations. Meanwhile the Brazilian Real rose from a nine year low in the build up to the Fed release.

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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.