Fed opens door to December US interest rate hike
29/Oct/2015 • Currency Updates•
UK businesses with exposure to the US Dollar were paying close attention to last night’s Federal Open Market Committee (FOMC) decision. While there was no interest rate hike announced for October, the Fed appeared to keep the door open to a rate increase in December by removing previous comments regarding global risks weighing on US growth.
The statement was also consistent with our expectations of a 2015 hike, suggesting if there are no major data disappointments in the next two labour reports, we will likely see a December interest rate hike. Markets now appear to be in agreement with this view, with pricing for a December hike consequently spiking to its highest level since mid-September at just shy of 50%.
The Euro weakened sharply, continuing its trend since the European Central Bank last week signalled it is set to expand its quantitative easing programme. Combined with an impending interest rate hike in the UK, this confluence of events could create a significant challenge for many UK firms.
In particular, UK firms that have a significant level of US or USD imports, and sell in any volume to the EU, may want to consider locking in their level of currency exposure sooner rather than later. Otherwise they could subject their profit margins to a double contraction. By hedging their exposure in both currencies, companies can protect their business against negative impacts from a potential global economic slowdown, led by events in China.
As another facet of a likely weakening Euro into 2016, European exporters may be very welcoming of earlier payments from UK importers in the near to medium term. This indicates that it could be a very good time to take advantage of credit facilities that create working capital efficiencies in the supply chain.
Major currencies in detail:
The UK currency was sent 0.3% lower against the US Dollar yesterday, with gains earlier in the day wiped out following the FOMC statement.
Yesterday proved to be void of any major economic announcements or data releases in the UK. As a result, almost all attention among Sterling traders focused on events elsewhere, mainly in the US.
The Pound recovered much of the ground it lost against the US Dollar on Tuesday. Data released showed that growth in the UK economy was slower than expected in the third quarter, although these losses were quickly reversed following the Fed’s statement.
A string of mostly second-tier economic data releases in the UK economy this morning are all worth noting. Nationwide house prices, mortgage approval figures and the Confederation of British Industry’s trade survey could all cause moderate volatility in the Pound today. However, market reaction to last night’s Fed statement should provide the main focus.
The relatively hawkish monetary policy statement from the Fed caused a sharp depreciation of the Euro, which ended 1.1% down versus the Greenback.
In terms of economic data yesterday, German consumer confidence declined modestly to a reading of 9.4 from 9.6, while import prices also proved to be relatively underwhelming, declining at a faster-than-expected pace of 4% on a year previous.
Despite ECB Member Christian Noyer claiming that the existing QE programme was working well, and needed time to bear fruit, Vice President Vitor Constancio opened the door to more easing yesterday by suggesting that the central bank stands ready to act in order to deliver on its mandate. This provides further evidence that the ECB will expand its QE programme in December, although Constancio made it clear that nothing as yet has been decided.
A busy day of Eurozone data sees German unemployment and Euro-area-wide business confidence this morning, which could prove to be market movers. Most attention, however, will be on this afternoon’s German inflation figures and European Commission growth forecasts.
The market reaction to the Fed decision was swift, as traders were clearly expecting the Fed to rule out a December hike. The US Dollar was subsequently sent higher against its major peers, sharply in the case of the Euro.
The statement itself, however, was not overly surprising. Jeffrey Lacker once again remained the sole dissenter by voting for an immediate rate hike. US policymakers acknowledged that the pace of US job creation had slowed and unemployment remained steady, although the central bank now appears slightly less concerned about global risks.
Critically, the Fed suggested that for a rate hike to occur there would need to be further improvement in the labour market and reasonable confidence among policymakers that inflation will gradually move back towards its target.
Therefore, absent any bad surprises in the next two labour reports at the beginning of November and December, we will likely see a Fed interest rate hike by year-end at the FOMC meeting on 16 December.
Attention today remains on the Fed, although focus will quickly switch to the latest growth figures for the third quarter, set for release at 12:30pm London time today.
Rest of the world
Sweden’s central bank, the Riksbank, opted to keep its benchmark interest rate unchanged at -0.35% yesterday, although announced it would be ramping up its QE programme by 65 billion Krona. This no doubt comes in anticipation of an expansion in the ECB’s QE programme in December.
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