Federal Reserve meeting minutes point to December US interest rate hike
19/Nov/2015 • Currency Updates•
The main focal point in the currency markets yesterday came from the Federal Reserve in the US with the release of the minutes from the October Federal Open Market Committee meeting. There were no real surprises, with the message from the October statement mostly reaffirmed, and the Fed clearly remaining data-dependent.
We believe that, barring a disaster in the November employment report, due out in the first week of next month, we should see a hike at the December meeting.
Having said that, the minutes suggest that there are likely to be dissenters next month, possibly as many as three, and that any further hikes will be both gradual and data-dependent.
Earlier, Fed member Lockhart claimed that he was “comfortable” with moving away from zero interest rates due to the settling down in global financial markets.
The Euro is expected to remain under pressure today with the European Central Bank releasing the minutes from its October monetary policy meeting at 12:30pm this afternoon.
The currency markets have mostly overlooked the ECB’s minutes in the past few months. However, with attention firmly fixed on the central bank’s next meeting in the first week of December, investors will be watching closely in order to obtain any clues regarding a possible expansion in monetary easing measures next month.
For UK businesses, retail sales could be a big mover this morning. Sales are forecast to have declined in October for the first time since June.
Major currencies in detail:
Strong gains for the Pound were somewhat wiped out as the day progressed yesterday, although the currency managed to end 0.1% higher versus the US Dollar.
There was little in the way of economic data yesterday, although the Pound was given a boost by some relatively hawkish comments from central bank member and Deputy Governor Ben Broadbent.
Speaking in London, Broadbent warned investors not to put too much faith in market bets on when the Bank of England would begin raising interest rates, and instead focus on the economic fundamentals that are driving the UK economy.
This is in line with our view that the markets, which now don’t expect an interest rate increase until 2017, have pushed a UK rate hike too far into the future.
Retail sales will be released at 9:30am this morning, with the CBI’s Industrial Trends survey at 11:00am also worth noting.
The Euro remained under pressure yesterday, ending 0.1% lower against the US Dollar. It was a quiet day in the Eurozone economy, with construction output the only data of note.
Output in the construction industry dipped once again, adding to the stream of mostly disappointing economic data we’ve seen out of the Eurozone over the past few months. Output declined by 0.4% for the month, with the industry continuing to suffer after nearly a decade of decline and stagnation.
Earlier ECB member Yves Mersch had some reassuring words, claiming that he saw no economic pessimism as a result of the attacks in Paris last week, and it was too soon to judge its long-term impact on economic performance.
The ECB’s minutes are the focus today, set for release in the early afternoon.
The Dollar was little moved yesterday evening, despite the Fed’s signals for a December interest rate hike, with the USD index ending 0.2% higher.
Policymakers appeared confident that economic conditions in December will warrant a hike. “Most” participants estimate that the criteria for hiking rates “could well be met” in December, while “some others…judged it unlikely”. This reinforces our belief that the Fed will hike interest rates next month, which should provide good long-term support for the USD.
Earlier, housing starts, which measure the construction of new family homes in the US, fell to a seven-month low in October. The figure released by the Commerce Department declined to 1.06 million from the revised 1.191 million recording in the month previous.
Yet, by contrast, housing permits, a good measure of future housing construction, soared to 1.15 million, suggesting that the apparent housing market slowdown could prove temporary.
The evolution of the US Dollar today will largely be driven by the reaction to last night’s Fed minutes. Initial jobless claims and another speech by Fed member Lockhart will also be in focus this afternoon.
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