Currency markets await Federal Reserve announcement tomorrow
26/Jan/2016 • Currency Updates•
There were relatively few currency movements on Monday and all the major currencies traded within narrow bands. This was due to a lack of significant economic announcements. The most important event in the markets this week is set to be the Federal Reserve’s interest rate decision tomorrow evening. Investors will be looking to gain clues as to whether the Fed remains on course to deliver the three or four rate hikes in 2016, as suggested by the recent ‘dot plot’.
Yesterday there was a question over whether or not the monetary policy meeting will go ahead because of severe weather conditions in Washington. It’s now been confirmed that the meeting will definitely take place.
As just one interest rate hike is priced in by the markets for 2016, expectations for this meeting are low. There’s a risk that perceived confidence among policymakers that the US economy remains broadly on track could be viewed as hawkish, especially amid the recent stock market turmoil.
Oil prices recommenced their recent downward trend on Monday after a short-lived rally at the end of last week. A decline in Brent crude of around 3% sent the Russian Ruble, Canadian Dollar and Mexican Peso sharply lower yesterday. The safe-haven Japanese Yen and Swiss Franc both received good support during the course of the day.
Sterling traders will again look to Bank of England Governor Mark Carney today, who will be speaking at the treasury select committee hearing at 10:45am.
Major currencies in detail:
The Pound remained under pressure on Monday, falling by 0.2%, with concerns over a delayed BoE rate hike and possible EU exit continuing to weigh on the currency.
BoE rate-setter Kristin Forbes echoed much of the recent dovish rhetoric we’ve heard from the central bank in the past couple of weeks. Speaking at an event in London yesterday afternoon, Forbes suggested that the recent fall in oil prices allowed the central bank ‘a bit more time’ when deciding on whether the time was right to begin tightening monetary policy.
She also implied that the UK labour market is stronger than recent data would suggest. Although, in line with comments from Governor Carney last week, they would need to be confident of a sustained increase in wages.
In terms of economic data, factory orders weakened in January following slowing demand for exports. The latest survey from the Confederation of British Industry declined to -15 from -7 in December, although there were signs of a possible recovery in early 2016.
The single currency ended higher against both the Pound (+0.3%) and US Dollar (+0.1%) yesterday.
The Euro’s modest rally on Monday came despite continued expectations that the European Central Bank will ramp up its easing measures in March. The latest poll from Reuters showed that 80% of the traders surveyed expected a cut in the deposit rate at the next meeting.
Over in Germany, the Bundesbank claimed that low oil prices boosted chances of higher economic growth this year. Meanwhile, the latest business confidence surveys from IFO showed that economic confidence in Europe’s largest economy soured this month. The expectations index fell to 102.4 from 104.6.
This week looks set to be relatively muted in terms of Eurozone economic announcements, with inflation figures on Friday morning the only major data point.
The US Dollar index traded within a narrow band on Monday to end the London session unchanged.
Data out of the US manufacturing sector continues to disappoint. The Dallas Fed index, which measures overall manufacturing growth in Texas, fell sharply for January. The index declined to -34.6 from -21.6, representing a contraction and its lowest reading in 11 years.
The manufacturing sector remains a major issue for the US economy. A strong US Dollar in trade weighted terms and weak demand from abroad look set to persist and do not bode well for the short-term future of the industry.
Wednesday’s FOMC meeting will remain the main focus of the currency markets this week. In the meantime, growth data from Markit and consumer confidence this afternoon could cause moderate US Dollar movement today.
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