Federal Reserve expected to announce US interest rate hike this evening
16/Dec/2015 • Currency Updates•
The Federal Reserve in the US has maintained what amounts to an emergency setting of monetary policy ever since former Chairman Ben Bernanke announced that the US central bank would be cutting its benchmark interest rate to effectively zero during the height of the financial crisis in December 2008.
However, Chair of the Federal Reserve Janet Yellen is almost universally expected to announce an increase in its benchmark interest rate at 7:00pm UK time this evening, the first of its kind in nine years.
We expect a 25 basis point rate hike to be announced, which should cause the US Dollar to recommence its appreciating trend against almost every major currency.
Providing we see an interest rate hike, the magnitude of the US Dollar rally will likely hinge on a number of factors. Firstly, the tone of the accompanying monetary policy statement and comments from Yellen, which may give a clearer indication regarding both the timing and pace of future rate increases. Secondly, the number of dissenters among the committee and the Fed’s “dot plot”, which represents where each member of the FOMC sees the benchmark rate in the next few years, will be highly significant.
Regardless of the accompanying commentary, tonight’s Fed announcement will likely see a great deal of volatility among almost every global currency. A hike will almost certainly see a US Dollar rally, while a surprise pass would enviably lead to a mass USD sell-off – although we don’t expect this to be the case.
Major currencies in detail:
An improvement in UK inflation yesterday was not enough to prevent the Pound falling 0.6% against the US Dollar, as investors continue to bet on an interest rate hike across the Pond.
Consumer price growth in the UK economy ticked upwards in November, albeit only marginally. Headline inflation in the UK rose to 0.1% last month, positive for the first time in four months. Inflation has now remained between -0.1% and 0.1% for the past 10 months, with stubbornly low oil prices and supermarket price wars keeping down prices for consumers. Core price growth also edged marginally higher, rising to 1.2% in the year to November, its highest level since July.
While almost all attention today is on the Federal Reserve, UK earning growth and the unemployment rate this morning will likely provide a further indication of how likely interest rates are to rise in the UK next year.
The Euro fell from a six-week peak against the US Dollar yesterday, depreciating throughout the day to finish 0.9% lower on increasing expectations for a US interest rate hike.
Tuesday was relatively light on the data front in the Eurozone. The latest confidence indices from ZEW were generally fairly positive, although not enough to halt the single currency’s slide. Economic sentiment in Germany rose above forecasts to 16.1 from 10.4, while the same measure for the wider Eurozone increased to 33.9 from 28.3.
The moderate gains in Eurozone confidence come amid a better overall economic outlook following recent improvements in the labour market and economic growth.
This morning we’ll see a host of economic announcements from the Eurozone. This will begin with service and manufacturing growth from France and Germany, followed by inflation data for the Eurozone at 10:00am.
The US Dollar was given a boost by impressive inflation data, causing the US Dollar index to climb by 1%, ahead of tonight’s Federal Reserve announcement.
Inflation in the US economy, a closely watched indicator by the Fed, accelerated strongly in November. Consumer price growth increased to 0.5% last month, higher than the 0.2% recording in October and its highest level since December 2014, suggesting inflationary pressures are beginning to return to the US economy. Equally impressive, the core level of inflation, which strips out volatile priced products such as energy, increased by 0.1% to 2.0%, finally hitting the central bank’s target for the first time since summer 2014.
A few second-tier data points will be released during London trading today, but all eyes are on the Federal Reserve interest rate announcement at 7:00pm this evening. Janet Yellen’s statement and press conference will begin at 7:30pm UK time.
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