Federal Reserve keeps US interest rates unchanged, closely monitoring global economy

Enrique Díaz-Álvarez28/Jan/2016Currency Updates

As expected, the Federal Reserve kept US interest rates unchanged last night following its latest monetary policy meeting. Currency and financial markets were little moved as a result.

In its statement the FOMC acknowledged the recent volatility that has plagued global financial markets, stating it was closely monitoring ‘economic and financial developments and is assessing their implications for the labour market and inflation.’

We think this implies that market fluctuations will impact Fed policy only in the way that they feed through to domestic US conditions, and in particular the labour market. So far there is no sign that this is happening and, as long as the US labour market continues its recent pace of job creation, we continue to think the Fed is on track for a 0.25% hike per quarter.

The market, however, remains bearish on the chances of an interest rate hike in the UK in the near term, with any potential upside for Sterling likely to be limited, whilst an overwhelming majority of economists now expect a cut in the ECB’s deposit rate in March to provide further monetary stimulus in the Eurozone in early 2016.

UK firms exporting to Europe still see this as a good time to lock in the value of their Euro cash flows before any rate cut occurs. Firms with suppliers pricing their goods in USD, including many firms which import from China, are currently looking to lock in their supply of Dollars over the medium term in order to avoid the risk of their profit margins being eroded significantly as rates increase and the USD strengthens.

Currency trading today will likely be dominated by fallout from last night’s Fed announcement. Sterling traders will also be closely monitoring UK growth figures for the three months to December, which are expected to show a modest improvement in the third quarter.

In other news, the South African Reserve Bank is meeting, with above-target inflation and a very weak Rand suggesting the central bank could hike interest rates by as much as 50 basis points today.

Major currencies in detail:


Tuesday’s encouraging rally in the Pound proved short-lived, with a fall in global stock markets dampening expectations for a Bank of England rate hike and erasing around half of Sterling’s gains. GBP finished 0.5% lower.

The Pound received little help from the latest housing data released yesterday. Data from the British Banker’s Association on Wednesday showed that mortgage approvals fell to a seven-month low in December, below 44,000 on a seasonally adjusted basis.

Moreover, prices rose by just 0.3% last month, according to Nationwide, moderating to 4.4% on an annualised basis. Prices are, however, expected to rise in coming months due to a strong labour market and healthy wage growth, which could provide modest headwinds for Sterling.

Bank of England Deputy Governor Minourche Shafik spoke in London yesterday, although disappointed the markets by failing to comment on monetary policy.


The Euro ended 0.3% higher against the US Dollar following the Fed announcement.

Economic growth prospects in the Eurozone were dealt a further blow yesterday after the German government trimmed its GDP forecast for the coming year. Europe’s largest economy, which accounts for over a fifth of overall economic output in the Euro-area, remains in ‘good shape’, although is now expected to grow just 1.6% in 2016. This came as consumer confidence remained unchanged at 9.4 this month, according to GfK.

Meanwhile, our previously-out-of-consensus expectation for further monetary stimulus in the Eurozone in early 2016 continued to be validated yesterday. The latest poll from Reuters showed that an overwhelming 85% of economists now expect a cut in the ECB’s deposit rate in March.

The Eurozone’s relatively data-light week continues today. German inflation figures at 1:00pm UK time on Friday will give a good indication of overall Euro-area consumer price growth.


The US Dollar index was little changed after the Federal Reserve meeting, ending 0.3% lower.

Overall, we had little new information from the Fed, hence the muted market impact. The FOMC emphasised lower oil prices would make it harder for the US to reach its 2% inflation target in the near term, although there should be some acceleration in the medium term. The statement also noted that economic growth slowed at the end of last year.

It was the comments on global developments, however, that leave the door open to a March rate hike, and one every quarter for the remainder of the year.

Durable goods order data at 1:30pm UK time will be the main data point for the US Dollar during trading today. Orders are expected to have declined in December for the sixth month in 2015.


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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.