Federal Reserve holds interest rates steady, hints at 2016 hike

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22 September 2016

Written by
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The Federal Reserve sprung no major surprises yesterday evening, keeping interest rates unchanged and strongly hinting that a hike could be on the way before year-end.

L
ast night’s closely watched statement acknowledged the US economy continues to strengthen, led by the labour market. Notably, the number of dissenters voting for an immediate hike rose from one to three, leaving the overall vote at 7-3 in favour of no change in policy. We think we’re close to the tipping point and expect the majority to vote for a hike in December.

However, any positive surprises in either inflation or the labour market could possibly bring the timing forward to the November meeting. Either way, we think that the Fed remains firmly on course to hike interest rates at some point in 2016 which should, in our view, recommence the US Dollar’s appreciation against almost every major currency in the next few months.

During yesterday’s London session, investors appeared unimpressed by the Bank of Japan’s tweak in monetary policy. The Yen surged to its strongest position in more than three weeks with the market sceptical about the BoJ’s ability to meet its 2% inflation target without further rate cuts or increased asset purchases.

Appearances from both the President of the European Central Bank and Governor of the Bank of England will be the main events in the currency market today.

ECB President Draghi will be speaking in Frankfurt at 14:00 UK time, with investors looking for any hints as to a possible expansion in the central bank’s QE programme before year-end.

Mark Carney will also be speaking in Berlin at 18:00 UK time this evening, providing the biggest event risks for Sterling today. We look for any clues as to Carney’s view on the need for additional stimulus in the UK economy this year.

Major currencies in detail:

GBP

Sterling touched a fresh five week low against the US Dollar on Wednesday, with investors remaining concerned over the impact of Britain’s looming exit from the EU.

This came despite comments from the Office for National Statistics (ONS) Chief Economist yesterday that claimed the referendum result had so far not had a major effect on the UK economy.

The latest data out of the UK has not been as doom and gloom as many had predicted, especially after both the manufacturing the services PMIs surged last month. The OECD even announced it was raising its growth forecasts for 2016 to 1.8% from 1.7% yesterday, albeit lowering its growth estimate for next year from 2% to 1%.

MPC members Cunliffe and Forbes will both be speaking today, at 14:30 and 18:00 UK time respectively, in a busy day of central bank appearances.

EUR

The Euro rose 0.4% against the US Dollar following the Fed announcement last night.

News out of the Eurozone continues to be thin on the ground this week, with the Euro driven almost exclusively by events out of the US and Japan over the past few days.

The main announcement came from the OECD, which lowered its growth forecasts for the Euro-area for both this year and next. The economy is now expected to grow by just 1.4% in 2016, down from 1.8%, and by 2.1% in 2017, from 2.2%.

Mario Draghi will be the highlight for the Eurozone today. Consumer confidence data is also expected to tick upwards slightly when released this afternoon.

USD

The US Dollar fell 0.5% against its major peers yesterday, due largely to the lack of any hawkish surprises from the Fed last night.

The FOMC’s dot plot also provided little help for the USD, with the median expectation for long term rates falling again.

We think that the lack of any significant reaction in EUR/USD reflects the fact that the statement and decision were in line with market expectations, although we expect the growing divergence in rate levels between the US and most other major economies to provide good support for the Dollar in the coming months.

We’ll see mostly second-tier economic releases out of the US today with housing and labour data this afternoon unlikely to materially shift sentiment towards the US Dollar.

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