Dollar down as Fed ‘dot plot’ now forecasts just two rather than four US rate increases
17/Mar/2016 • Currency Updates•
The Federal Reserve sprung no surprises on Wednesday evening, with policymakers once again voting to keep interest rates unchanged. However, the US Dollar plunged after Federal Open Market Committee members lowered their expected forecast for the pace of future hikes from four rate increases this year to just two.
With core inflation in the US now back on target and labour market conditions continuing to improve, we think that the Fed will now hike twice this year, in line with the latest ‘dot plot’.
This is far above what the markets are pricing in and we expect upward pressure on the US Dollar to recommence once these unrealistic expectations are corrected and brought closer in line with the Fed’s view.
Earlier in the day, George Osborne’s budget sent Sterling temporarily lower, following the release of downgraded growth forecasts for the UK economy. The latest forecasts from the Office for Budget Responsibility (OBR) were lowered sharply to 2% for this year and 2.2% for 2017, down from the 2.4% and 2.5% estimates made back in November.
Thursday will be another busy day in the currency markets, with focus for UK businesses undoubtedly on the Bank of England’s monetary policy meeting at midday today. The interest rate will almost certainly remain unchanged, with Sterling traders instead focusing heavily on the tone of the accompanying monetary policy statement.
While global conditions have improved since the last meeting, the domestic picture has softened slightly, with the latest PMIs of particular concern. This could open the door to a more dovish statement this afternoon, although we don’t expect the central bank to rock the boat.
While it’s unlikely that we’ll see a vote for an immediate cut from one of the more dovish members of the committee, this could materialise as a risk for Sterling in the coming months, especially if the employment situation softens.
Major currencies in detail:
Sterling ended 0.9% higher against the US Dollar following yesterday’s Fed meeting.
The UK labour market continues to perform strongly, reinforcing our view that the Bank of England will hike interest rates for the first time in the fourth quarter of this year.
Average earnings grew by 2.2%, excluding bonuses, and 2.1%, including bonuses, in January, both marginally higher than the 2% and 1.9% recording in the three months to December. Real wage growth remains firmly positive with wages now back in excess of 1% higher than core inflation.
Unemployment also continues to impress. The unemployment rate remained unchanged at 5.1%, although the number of those out of work declined in real terms by 28,000 on the previous quarter.
The BoE’s interest rate decision will be the only announcement in the UK today, released in tandem with the central bank’s monthly statement at 12:00 UK time.
The Euro soared against the US Dollar following the Fed meeting, ending 1% up.
Announcements in the Eurozone were relatively light on the ground on Wednesday, with almost all attention fixed on the US.
German Chancellor Angela Merkel spoke in Berlin on Wednesday afternoon regarding the state of the German economy. Merkel claimed Germany’s export markets were ‘very unstable’, with growth ‘not bad but not exceptionally good’. The German economy grew by just 0.3% in the final quarter of last year.
Trade balance and inflation figures this morning will be the only major releases in the Eurozone economy today.
Delayed forecasts for future Fed interest rate hikes sent the US Dollar tumbling by 1.1% on Wednesday.
Yesterday’s FOMC press conference struck a fairly neutral tone but mentioned the global economic slowdown and financial volatility. Importantly, Chair Janet Yellen left the door open to an April hike by claiming it was a ‘live possibility’, which the markets at present are completely discounting.
During afternoon trading, the latest inflation figures out of the US were encouraging. Headline consumer price growth dipped, although exceeded expectations at a solid 1%, while the core measure grew again, accelerating to 2.3% from 2.2%. Improving inflation dynamics puts the Fed on course to hike rates twice this year.
JOLTS jobs data and the weekly jobless claims in the US this afternoon could receive some attention today.
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