Janet Yellen hints at 2015 US interest rate hike
25/Σεπ/2015 • Currency Updates•
Chair of the Federal Reserve Janet Yellen caused the US Dollar to strengthen yesterday evening by talking up a 2015 rate increase in the US. The main headline earlier in the day regarded the Norwegian Krone, which fell by over 2% after Norway’s central bank, Norges Bank, slashed its benchmark interest rate by 25 basis points to 0.75% and suggested that more rate cuts are on the horizon.
Elsewhere, a Bank of England member suggested he would not yet vote for an interest rate increase, possibly delaying monetary tightening from commencing in the UK. US growth data is the highlight today, with any revision from the 3.7% figure likely to impact the Dollar.
Dovish commentary from an MPC member, coupled with Yellen’s comments, caused Sterling to depreciate by 0.3% versus the Dollar yesterday.
In terms of economic data, mortgage approvals increased to their highest level in eighteen months in August, with net lending hitting a five year high before the UK’s record low interest rates are increased next year. Approvals rose to 46,473 from 46,315 in another clear sign of a strengthening labour market.
We had some further comments from Bank of England member Ben Broadbent yesterday. Broadbent, unlike many of his colleagues in the monetary policy committee, claimed that he has not been close to voting for higher rates in the UK at recent meetings. While he acknowledged that growth in the domestic economy was “fairly robust”, downside risks from abroad meant that he was not surprised financial markets had pushed back bets on when the central bank would be raising rates. As is our view, he claimed that the UK labour market was of more importance to the central bank than the timing of a Fed rate hike in the US. Such comments suggest that the Bank of England may not wait for the Fed before hiking interest rates.
The single currency gained momentum yesterday morning following comments from Mario Draghi that suggested an expansion of QE may not be imminent. However, talk of a rate hike in the US sent the Euro 0.2% lower against the Greenback.
The latest round of the ECB’s targeted LTRO showed decreasing demand by Eurozone banks for low interest rate loans. Euro-area banks bid €15.5Bin August, down from €73.8B recorded a month previous.
Earlier it was revealed that confidence among German consumers was dampened by concerns surrounding the refugee crisis and worries about the global economy. The latest confidence index from GfK dipped from 9.9 last month to 9.6 this month.
By contrast, confidence among businesses went the other way, improving month-on-month in Europe’s largest economy. According to the latest index from IFO, business confidence rose marginally from 108.4 to 108.5, its highest level since May.
The US Dollar experienced a late rally last night following some hawkish comments from Fed Chair Janet Yellen, with the US Dollar index ending 0.25% higher.
All eyes were on Janet Yellen last night, who reiterated a rate increase in the US this year was still on the cards. The Fed chair claimed that a rate hike “sometime later this year” would likely be appropriate. Speaking in Massachusetts, Yellen’s argument centred on her belief that slack in the economy has diminished enough to start seeing inflationary pressures return. The pace of tightening would then be gradual as it approaches normalisation.
Earlier in the day, data showed that sales of new homes increased more than expected in August, climbing by 5.7% on a month previous to 552,000. Durable goods orders were weak, falling by 2% in August, for the first time in three months and putting a Federal Reserve interest rate hike further in doubt. Excluding transportation, orders remained flat. Meanwhile, jobless claims continued to point to a tightening labour market, with initial claims registering a below forecast 267,000 last week.
Rest of the world
The Turkish Lira, South African Rand, Mexican Peso and Brazilian Real all touched records lows against the US Dollar. Continued expectations that the Federal Reserve would be hiking interest rates this year has brought about a further sell-off in many emerging market currencies.