Federal Reserve causes massive volatility in global markets

Enrique Díaz-Álvarez19/Mar/2015Currency Updates


Dovish Bank of England minutes were overshadowed by the FOMC minutes last night which caused Sterling to soar by a massive 1.3% on the Dollar, having at one point been an astonishing 2.8% higher for the day.

The Bank of England once again voted unanimously to keep interest rates unchanged for the third consecutive month yesterday. Minutes from the March meeting showed that the Bank of England is in no hurry to raise interest rates soon. The main change from the previous minutes is the much greater attention paid to FX moves, and in particular Sterling trade-weighted appreciation. A recent strong appreciation of Sterling against the Euro, and expectations of future Pound strength, given the divergence in monetary policies, will keep inflation lower for longer according to policymakers. This central bank dovishness leads us to revise our view on an interest rate hike. We now forecast the Bank of England to hike rates in Q1 of next year, and not in 2015.

In tandem to the Bank of England, ONS wage growth surprised on the downside. Earnings growth slowed to an annual rate of 1.6% in the three months to January, down on the 1.7% recorded last month. Including bonuses this was down even further, falling from 2.1% to 1.8%. On the flip side, unemployment decreased again, down by 102,000 to 1.86 million. The unemployment rate remained constant at 5.7% last month.

In the early afternoon George Osborne delivered his sixth budget as Chancellor. Importantly for the FX markets, growth forecasts were revised upwards from 2.4% to 2.5%, unemployment was revised down to 5.3%, while inflation is expected to fall to 0.2% in 2015.


The Euro climbed by an astonishing 2.2% versus the Dollar yesterday evening after the FOMC press conference, although this was largely corrected during Asian trading.

Construction output in the Euro-area increased marginally by 1.9% MoM and by 3% on an annualised basis, its largest climb since June. More data from Eurostat showed the trade surplus widened in January from a year previous. A 6% fall in imports due to low energy prices and flat exports, caused the trade surplus to grow to €7.9 billion. In other news, dozens of people were hurt and another 350 arrested after anti-austerity demonstrators clashed with police at the opening of the new ECB building in Frankfurt.

The ECB’s economic bulletin from March’s central bank meeting at 9am this morning should shed some more light on the QE program. The announcement of the next round of targeted LTRO at 10.15am, the only over release in the Eurozone today.


The US Dollar tanked by 2% in a single day against its peers on Wednesday after the Federal Reserve signalled higher interest rates were coming.

As expected, the Federal Reserve was unanimous in its removal of the need to be “patient” on the next rate hike, although noting an increase at the April FOMC meeting was “unlikely”. The central bank’s infamous “dot plot”, showed that 15 of the 17 members expected rates to increase in 2015, although the median estimate for the federal funds rate was slashed to 0.625% for year-end from the 1.125% estimate in December. Fed Chair Janet Yellen signalled there was no rush to hike, with the need for further evidence of improvement in the labour market and inflation. In a more dovish than expected statement, the Fed cut its inflation and growth outlook for 2015. The removal of the Fed’s “patient” stance gives a greater deal of flexibility, with focus now squarely shifting to data.

The market reaction was unprecedented, with the Dollar posting its largest one day fall in six years against both Sterling and the Euro. Reaction from the statement should drive global markets today.

Rest of the world

The Swedish National Bank continued to loosen monetary policy on Wednesday by slashing its benchmark interest rate for the second time in a month to -1.25%.


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.