Federal Reserve pledges to be flexible on forthcoming interest rate hike

Enrique Díaz-Álvarez25/Feb/2015Currency Updates

GBP

A subdued day for the Pound on Tuesday saw Sterling climb by 0.1% on the Dollar.

Governor of the Bank of England Mark Carney reiterated the temporary nature of low inflation in the UK at Tuesday morning’s inflation report hearing. Carney pledged to bring price growth back to the 2% target within a “reasonable horizon” of two years, again stressing that evidence of a sustained fall in inflation could lead to a cut in the interest rate from its current 0.5% level. Earlier, Bank of England hawk Kristin Forbes warned keeping rates at their historic lows for too long could threaten economic recovery in the UK. While these risks were “moderate and manageable” they could lead to an increase in inequality and a reduction in productivity according to Forbes.

A lack of significant data releases in the UK today could lead to a quiet day’s trading for the Pound. The British Bankers Association will, at 9.30am, be releasing its mortgage approvals data for January.

EUR

Markets in Europe were mostly unaffected by developments in Greece, with the Euro once again trading within a narrow band of its peers, appreciating by 0.2% against the Dollar and by 0.1% versus the Pound.

Finance ministers in the Eurozone officially approved the Greek government’s request for a four month bailout extension after a one hour conference call in which they scrutinised a proposed reform package. However, the Eurogroup, ECB President Mario Draghi and the IMF all raised concerns over the list, criticising a lack of specificity, with IMF Managing Director Christine Lagarde deeming the package as insufficient to ensure a successful review of its IMF programme.

Inflation in the Eurozone was confirmed by Eurostat at -0.6% in January. This matches the low reached during the height of the financial crisis in 2009. The core level of inflation remained at 0.6%. Earlier, strong domestic consumer demand and a spurt in investment in Germany helped lift growth in Europe’s largest economy in Q4. Gross domestic product rose by 0.7% in the final three months of the year to boost annualised growth to 1.6%, well above the overall Eurozone level.

Today, Mario Draghi will be speaking in Brussels at 2:30pm UK time.

USD

A busy day in the US economy today saw the Dollar finish the day 0.2% down against its major peers.

Federal Reserve Chair Janet Yellen made her semi-annual testimony in front of congress on Tuesday afternoon, laying the groundwork for an interest rate hike. Yellen warned markets that the first interest rate hike since 2006 could happen at any meeting. Key economic indicators, namely labour market conditions and inflation, will be crucial as the central bank considers the next hike “on a meeting-by-meeting basis”. We still expect this to happen at the June meeting.

Away from the Fed, Tuesday was a busy day for data in the US. Consumer confidence fell away from its multi-year high achieved in January, declining below forecast this month from 103.8 to just 96.4. The survey showed that, while the number of consumers who were expecting a deterioration in conditions had remained unchanged month on month, the number who were expecting an improvement had declined. By contrast, Markit’s flash services PMI surprised on the upside, climbing considerably in February by 2.8 index points to 57.0. This represents the fastest expansion in the sector since October and is broadly in line with the average seen during 2014 after a strong rebound in new work this month. The composite index, which includes the monthly manufacturing index, also climbed to 56.8 from 54.4.

Yellen will continue her testimony at congress today, with proceedings recommencing at around 3pm London time.

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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.