Fed keeps US interest rates unchanged for now but we continue to expect two hikes in 2016
28/Apr/2016 • Currency Updates•
The US Federal Reserve sprang no surprises last night, keeping its benchmark interest rate unchanged, at between 0.25-0.5%, following its recent rate hike in December. This was in line with our and the markets’ expectation, which all but completely discounted the possibility of a rate increase.
Financial turmoil and a China-induced slowdown in the global economy this year have caused most analysts, ourselves included, to push back their forecast for Fed hikes.
Next week’s labour report and nonfarm payrolls figure could give the market a better indication of whether a hike at the Fed’s next meeting in June is a realistic possibility.
The US economy, in particular the labour market, has continued to perform strongly, with solid job creation, multi-year-low jobless claims and unemployment near the level that the Fed deems as full employment.
We continue to expect the Fed to hike twice in 2016, which should ensure a gradual long-term strengthening of the US Dollar against most other major currencies, in particular the Euro. Some US Dollar buyers see this as an opportunity to hedge their currency exposure before the long-term strengthening of the US Dollar recommences.
In the UK yesterday, data showed that economic growth slowed in the first quarter of the year, in line with expectations. This sent Sterling lower against both the US Dollar and the Euro.
Sterling has been benefitting from both fewer concerns surrounding Britain voting to leave the UK at the June referendum and the increasing number of market participants believing the Fed won’t hike interest rates this year. This gives UK importers a small window of opportunity to take advantage of temporary Sterling highs against both the Dollar and Euro.
Earlier, the Australian Dollar plunged by over 2% against the Greenback after inflation figures in Australia massively undershot expectations, rising by just 1.3% in the first quarter of the year.
Trading today will likely be dominated by last night’s Fed announcements. US growth figures for the fourth quarter this afternoon are expected to show the world’s largest economy slowed in the first three months of the year.
Major currencies in detail:
Concerns of a slowdown in the UK economy sent the Pound 0.15% lower during London trading yesterday.
The UK economy grew by just 0.4% in the first three months of 2016, down on the 0.6% recorded in the fourth quarter, according to the Office for National Statistics.
A drop in manufacturing and construction output offset much of the impressive performance in the UK’s dominant services industry, which grew by an impressive 0.6%.
Governor of the Bank of England Mark Carney suggested in a written response that, should Sterling fall sharply following a vote to leave the EU, the effect on inflation would not be easy to predict.
The Euro was mostly range-bound during the London session, ending 0.1% higher against the US Dollar.
Confidence in the German economy ticked upwards slightly last month, according to the monthly survey from GfK. The index climbed by 0.3 points to 9.7, its highest level since September, with consumers more optimistic about the prospect of higher wages and larger pensions.
Elsewhere, ECB member Phillip Lane spoke on Tuesday, reiterating that the Governing Council did not consider the use of so called ‘helicopter money’ at its most recent meeting.
Eurozone-wide consumer confidence data this morning is expected to remain unchanged, while German inflation figures this afternoon are expected to show consumer prices barely grew this month. This could ramp up pressure on the European Central Bank, whose easing measures have, so far, failed to reignite the stagnant Eurozone economy.
Economic data released before the Fed meeting yesterday was mostly positive.
The trade deficit in March narrowed more than expected, falling from $63 billion in February to a one-year low of $57 billion in March, and could provide a welcome boost to this afternoon’s GDP figure. This reflected a sharp decline in the import of goods, which reached its lowest level in more than five years.
Pending home sales also provided a pleasant upward surprise. Sales rose by 1.4% in March, more than the 0.5% forecast.
First-quarter US economic growth is expected to slow to an annualised 0.7% from 1.4% when released this afternoon. Any negative surprises could weigh on the US Dollar today and cause investors to push back their expectations for the timing of the next US interest rate hike.
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