Currency markets poised for hectic week of central bank meetings

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12 December 2017

thomasdodds

The Euro recovered from its weakest position against the US Dollar in over two weeks on Monday, edging back towards the 1.18 mark as investors awaited a host of central bank announcements later in the week.

F
irst on the docket will be the December meeting of the Federal Reserve on Wednesday evening, where policymakers in the US are expected to raise interest rates for the third time in the calendar year. Following another impressive few months of economic data in the US and a generally hawkish tone of communications from a number of senior rate-setters on the FOMC, Fed funds futures are placing almost a 100% chance of a rate hike on Wednesday. The key to the Dollar will instead be the tone of communications from the Fed’s statement and that of outgoing Chair Janet Yellen. We expect an unchanged ‘dot plot’ and generally upbeat set of comments that would imply at least three hikes are on the horizon in the US next year.

Then on Thursday afternoon we’ll have the meetings of both the European Central Bank and the Bank of England in what is shaping up to be a particularly volatile session of currency trading. While neither bank will likely announce any policy alterations, investors will be hoping to better gauge potential policy moves in 2018.

We think the ECB will acknowledge the recent bounce in growth in the Euro-area, while continuing to issue caution over the inflation rebound that would warrant interest rates remaining low for a prolonged period of time. As for the BoE, policymakers are likely to keep the message from the November meeting more-or-less unchanged as the spectre of the Brexit negotiations continues to loom large over the central bank’s decision making.

Sterling edges lower, UK inflation rises to fresh six year high

In an unusually quiet session of trading on Monday, Sterling instigated a brief rally in the morning before trailing off to end back below the 1.34 level on the greenback. This morning’s inflation data provided no more than a temporary boost to the Pound. Inflation in the UK accelerated further in November, rising to a six year high 3.1% year-on-year. We think that should inflation continue to print above the 3% level, additional interest rate hikes from the Bank of England remain on the table next year.

Meanwhile, the US Dollar reacted negatively to the latest set of JOLTs job openings figures. Job opening in the US declined to 5.996 million in October after investors had eyed a reading around the 6.1 million mark.

President of the European Central Bank Mario Draghi will be making a short speech at an event in Frankfurt today. However, with the ECB Governing Council meeting just days away, any meaningful comments on monetary policy are highly unlikely.