Federal Reserve cautious over interest rate hike; Bank of England remain unanimous

Enrique Díaz-Álvarez19/Feb/2015Currency Updates

GBP

Strong labour market figures released in the UK caused Sterling to rally on Wednesday, appreciating by 0.6% against the Dollar and soaring to its strongest position in over six weeks.

Signs of a division between Bank of England policymakers returned at this month’s monetary policy meeting. While all nine members once again voted to keep interest rates unchanged for the second consecutive meeting, the decision was a “finely balanced one” for two. A weak short term inflation outlook, which last week Mark Carney warned may dip into negative, warranted keeping interest rates unchanged at 0.5% for this month. Minutes of the meeting were mixed. All members anticipated rate hikes over the next three years, however, it marked the first time since September 2013 that the Bank of England publication has raised the possibility of injecting additional stimulus into the economy.

The labour market in the UK continues to show a healthy improvement. Unemployment unexpectedly fell to its lowest since August 2008 at just 5.7%. The number of people out of work in the UK was down by 97,000 to 1.86 million in December with an employment rate of 73.2% the joint highest since ONS records began in 1971. Equally as encouraging for Britain’s workforce, average earnings rose by 1.7% in the final three months of last year. Taking bonuses into account, this figure soars above Bank of England expectations to 2.1%, the highest since June 2013 and further above inflation.

Today looks set to be a quiet day for the UK economy, with the CBI’s industrial trends survey the only data out.

EUR

The Euro ended the day up slightly by 0.1% on the Dollar after the Federal Reserve minutes on Wednesday.

News in the Eurozone remains dominated by Greece. The Greek government has confirmed that it will apply for a six month loan extension to its current arrangement in a bid to avoid running out of funds before the end of February and provide time to find a permanent solution to its debt crisis. The request, however, is not expected to arrive in Brussels until Thursday morning. In terms of data, construction output in the Eurozone fell for the second straight month in December, declining by 0.8% and by 3.5% on an annualised basis.

At 12:30pm today the ECB will publish, for the first time, accounts of their monetary policy deliberations from their January meeting. This is followed by consumer confidence at 3pm London time, both should cause moderate volatility.

USD

A muted market reaction from the Federal Reserve’s fairly dovish minutes caused the Dollar to end the day 0.1% up on its peers.

A whole host of releases in the US surprised mostly on the downside on Wednesday. Building permits issued in the US fell unexpectedly in January, down by 0.7% to a seasonally adjusted 1.053 million. The same report also showed that housing starts, the number of new single family homes constructed, also declined by 2% last month to 1.065 million units. Industrial production was up 0.2% in January although average changes in producer prices fell by 0.8% to remain static YoY. Elsewhere, the Federal Reserve’s measure of capital utilisation dipped marginally to 79.4%, down from 79.7% recorded in December.

The Federal Reserve minutes were surprisingly dovish on Wednesday evening. Policymakers expressed concern over rushing into an interest rate hike too soon and derailing the economy. Stubbornly low inflation remains a concern for “several” members of the central bank, while highlighting a slowdown in China and tensions in the Middle East and Ukraine as downside risks to growth. The minutes maintained the need to be “patient”, with a number of participants pointing to need for further improvement in the labour market and growth.

A standard day of Thursday releases in the US today will see initial and continuing jobless claims at 1:30pm.

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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.