Currency markets await Federal Reserve clues this evening
18/Nov/2015 • Currency Updates•
All eyes this evening move to the minutes from the Fed’s October monetary policy meeting, released at 7:00pm GMT today. These minutes will give us further insights into the outlook of the Fed. The hawkish October FOMC statement and recent comments from policymakers suggest that the minutes may prepare the markets for a rate hike in December. In the unlikely scenario that we see either dovish comments or focus on weak core inflation in the minutes, the US Dollar could be sent lower this evening.
The Pound has received good support since Tuesday after encouraging signs of a moderate improvement in inflationary pressure in the UK economy. Annualised inflation remained negative again at its joint lowest level since 1960 in October. However, a moderate increase in the level of core inflation, which strips out the effect of the recent oil price slump, was enough to provide good support for Sterling yesterday.
Across the pond, US headline inflation rose above forecast, providing further weight to the argument that the Federal Reserve will begin tightening its monetary policy when the central bank next convenes in a month’s time. The Dollar was barely moved by the news.
However, fundamentally, an organisation with Dollar exposure should keep an eye on the markets and prepare for the possible further appreciation of the currency over the next 24 months.
Major currencies in detail:
Yesterday’s encouraging inflation data has provided good support for the Pound in the past couple of trading sessions against both the US Dollar and Euro.
Headline inflation declined once again in the UK in October, remaining at -0.1%, according to the Office for National Statistics. This marks the first time consumer prices have fallen two months in a row in over half a century, with sizable decreases in the prices of fuel and food continuing to hold back expectations for the first Bank of England rate hike since the financial crisis.
However, encouragingly, core inflation increased by 0.1% to 1.1%, its highest level in three months, in a tentative sign that inflationary pressures are returning to the UK economy. Sterling found comfort in the data, with the currency rallying against most of its major peers following the release yesterday morning.
No data releases in the UK today, so attention will be on events elsewhere, mainly in the US.
The Euro declined marginally yesterday, down to a fresh seven-month low against the US Dollar after dovish central bank comments and weak data.
ECB member Peter Praet implied that the Governing Council could expand its monetary stimulus next month, by claiming policymakers would discuss the need for further action in the context of heightened uncertainty. He also suggested that inflation expectations remain fragile in the Eurozone.
Elsewhere, economic sentiment in the Eurozone declined according to the monthly ZEW survey. The index for the Eurozone fell from 30.1 to 28.3, despite an increase in Germany, with the global economic slowdown continuing to weigh on confidence.
Data today is light in the Eurozone, with only construction output worth noting.
The Dollar has been well supported since Tuesday, after the chances of a December Fed interest rate hike were given a further boost following the release of the latest inflation data yesterday, which showed that prices increased by 0.2% in the year to October.
An increase in the costs of food, gasoline and medical care will be good news for Fed hawks. Stagnant inflation, which has remained around zero for the past 10 months, has been one of the primary reasons why the central bank opted not to hike interest rates at both the September and October FOMC meetings. Meanwhile, in another encouraging sign, core inflation also remained close to the Fed’s 2% target, at 1.9%.
By contrast, underwhelming industrial production data showed that output in the sector dipped for the third straight month by 0.2%. House prices also fell last month, with the NAHB housing market index declining from 65 to 62.
Before the Fed minutes this evening there will be a string of speeches from central bank members that could provide further clues to monetary policy plans. Members Lockhart, Mester and Dudley will all be speaking at a panel at the Clearing House Annual Conference.
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