Federal Reserve remains divided over next interest rate hike

Enrique Díaz-Álvarez21/May/2015Currency Updates


The UK currency rallied against its peers yesterday morning following the release of the Bank of England minutes from its May meeting, ending the day 0.3% higher on the US Dollar.

The views of policymakers appeared mostly in line with last month, with the central bank remaining unanimously against any change in the interest rate, with the vote remaining at 9-0. The release was perhaps slightly more hawkish than expected, hence the Sterling rally. Two of the members once again felt the decision was a “finely balanced” one, with the minutes highlighting the risk that falling unemployment could trigger faster wage growth and a bigger than expected pick-up in inflation. The Bank of England reiterated last week’s commentary that inflation is expected to pick-up within the next few months, something that could lead to a change in their voting as soon as June. The minutes themselves appeared in line with our expectations for a rate hike in the first quarter of 2016.

A handful of small announcements in the UK this morning will centre on retail sales at 9.30am.


The Euro declined against Sterling on Wednesday, although traded within a narrow band against the Dollar to finish 0.1% higher.

Downward pressure on the Euro was driven by the growing concern that Greece will miss its next repayment to the IMF. A government spokesman yesterday morning suggested that Greece could miss its 305 million Euro’s repayment (due 5th June), unless lenders hand over fresh funds soon. The country it seems now has just a matter of two weeks to secure a deal with its creditors or risk potentially triggering a default. Rating Agency Moody’s yesterday warned that the risk of Greece imposing capital controls (i.e. restricting movements of money in and out of the country) has “materially increased” over the past few weeks.

Just a couple of small data releases in the Eurozone yesterday. Construction output across the Euro-area rose in March, up by 0.8%, while producer prices in Germany remained mostly unchanged in April, down by 0.1%.

Thursday looks set to be another busy day in the Euro-area, with announcements throughout the day likely to influence the Euro. Manufacturing growth in the morning is followed by the ECB’s MPC meeting accounts just after midday, before Mario Draghi speaks after markets close at 6.30pm BST.


Last night saw a rather muted reaction to the release of the latest FOMC minutes. The US Dollar ended the session mostly unchanged, 0.1% lower against its major peers.

The major news story in the FX world on Wednesday instead concerned the record fines issued to five of the world’s largest banks. JP Morgan, Barclays, Citigroup, RBS and UBS were fined a combined $5.7 billion for the manipulation of exchange rates from 2007-2012 as part of the infamous “forex scandal”. All the banks were fined by both the Department of Justice and the Federal Reserve.

Market reaction to the Fed meeting minutes was unusually subdued yesterday evening. The minutes themselves were very mixed, with FOMC members are in disagreement about the economic slowdown that followed the particularly harsh winter weather. The “few” members that thought the US economy would be ready for a June hike were overshadowed by the “many” that deemed economic data insufficiently strong to warrant the rate hike. Policymakers believed the bump in inflation was offset by a weaker labour market and softer data. The FOMC showed little concern for the recent slump in first quarter growth, attributing it to “transitory factors”. However, the Fed it seems is now unlikely to raise the benchmark rate at its June meeting, with attention instead turning to a possible July increase.

Another week of impressive jobless claims is expected when the data is released this afternoon. This is followed by existing home sales and the Conference Board’s leading indicator at 3pm London time.


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.