Federal Reserve remains on course for interest rate hike

Enrique Díaz-Álvarez18/Jun/2015Currency Updates


The Pound strengthened sharply on Wednesday morning against the US Dollar, touching a one month high having been buoyed by impressive earnings data. Perceived dovishness from the FOMC sent the Pound 1.2% higher against the Dollar.

Sterling experienced a sharp rally yesterday morning, driven not by the Bank of England minutes, but instead by very strong earnings growth that far outstripped even the most optimistic of forecasts. According to the Office for National Statistics, wages grew by 2.7% in the three months to April, its fastest rate of growth since the financial crisis. Wages growth in the UK is now far outstripping inflation, and has done so for the past six months. The level of unemployment in Britain remained unchanged at 5.5%, despite the number of people out of work dropping by 43,000 to 1.81 million in April.

There was little new information from the Bank of England in its monthly monetary policy minutes, with the MPC’s outlook mostly unchanged from last month. The central bank warned that the UK economy could be affected when other countries start raising interest rates, although underlined the importance of inflation on the timing for UK hikes. The decision to keep rates unchanged was unanimous again this month, although remained “finely balanced” for the two hawkish members. The topic of consumer spending took centre stage at the meeting, with policymakers apparently surprised that lower fuel prices had not had a larger effect on spending.

Sterling, as with most world currencies today, will likely be driven by last night’s Federal Reserve meeting. Any surprises in this morning’s retail sales figures may cause additional volatility.


The single currency depreciated against both its major peers during morning trading yesterday, with growing doubts over the future of Greece in the Eurozone weighing on the Euro. However, post-FOMC the Euro rose by 0.6% versus Greenback.

Greek negotiators admitted on Wednesday that the country could make concessions with creditors in order to strike a deal, but only if it was “economically viable”. It appears that Greece will only sign a sustainable deal that addresses debt, financing and investment issues. It is now clear that the future of the country in the Eurozone is likely dependent on whether a deal can be struck before the IMF repayment deadline at the end of the month. The Greek central bank claimed that failure to reach a deal would lead to a Greek default and its ultimate exit from the Eurozone. However, Alexis Tsipras reiterated that he would only agree to a deal if an honourable compromise is met. Elsewhere, inflation in the Euro-area was confirmed at 0.2% in May according to Eurostat, with core price growth 0.9% higher on a year previous.

Greece as always will remain in focus on Thursday. The Euro group, chaired by European President Jeroen Dijsselbloem, will be meeting to discuss the crisis, although reports suggest that the meeting could be a short one. Elsewhere, the ECB will be releasing its economic bulletin, followed by the latest round of its targeted LTRO.


The US Dollar fell by 0.6% versus its peers after the Federal Reserve remained non-committal over the timing of the next rate hike.

Last night we saw the announcement of the Federal Reserve interest rate decision and the release of the FOMC monetary policy statement. The Federal Reserve left rates unchanged today as expected almost unanimously. Messages from the statement and meeting materials did not change much from the March meeting. It lowered somewhat its expectation for growth and the labour market this year, while leaving its projections for the medium and long term largely unchanged. Inflation expectations were virtually unchanged.

The key “dots” chart showed a slight downward revision to expected year-end Fed Fund rate for 2016 and 2017. However, and critically, the expectation for the end of this year was unchanged at 0.625%, which implies two rates this year. We think that these will take place at the September and December meetings respectively. However, at the press conference, Chairman Yellen sounded cautious about the improvement in the labour market and did not commit to a move in September. This perceived dovishness sent the dollar lower by roughly 1% in trade weighted terms.

Markets will be dominated today by fallout from last night’s FOMC meeting. There are a number of other releases worth bearing in mind today, notably inflation figures for May at 2.30pm and the Conference Board’s leading indicator at 3pm, both 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.