US Dollar slips after Fed, Bank of England to hold rates steady today

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22 March 2018

thomasdodds

The Federal Reserve voted anonymously on Wednesday to raise interest rates, as expected, for the first time so far in 2018 in Jerome Powell’s first meeting as the new Chair.

W
ith fed fund futures showing that the market was fully pricing in a hike going into the meeting, investors were instead far more concerned with the release of the FOMC’s latest interest rate projections. The bank’s ‘dot plot’ was revised higher from the previous from December, albeit only modestly. Policymakers in the US continue to expect to hike on three occasions in 2018, although median rate projections for 2019 and 2020 were shifted upwards.

The committee now anticipates rates to end next year at an average of 2.9%, implying three hikes in 2019 compared to two expected in December, and 3.4% in 2020, up sharply from the previous 3.1% estimate. It is important to note that there is a fairly sizable disparity between the median and mean measures of future hikes in 2018, suggesting many of the member are open to four hikes this year.

The tone of communications in the bank’s statement also remained upbeat, particularly on the strength of the labour market. Despite the hawkish assessment from the Fed, the US Dollar slipped by around half a percent against both the Euro and the Pound off the back of the announcement. The market reaction suggests that investors’ expectations were very high going into the meeting and were much more hawkish than we had anticipated.

Both the statement and economic projections confirm to us that we’re likely to see a minimum of three interest rate hikes from the Fed in 2018, with a strong possibility of four should the inflation outlook improve.

Will the Bank of England all but confirm a May rate hike?

Prior to last night’s meeting, the Pound rose by around half a percent during London trading after the release of the latest UK labour report reinforced expectations for another interest rate hike by the Bank of England at its May meeting. Real wage growth looks on course to creep back into positive territory in the coming months after average wage growth excluding bonus ticked up to 2.6% in January. With inflation falling back to 2.7% last month, we are now close to a tipping point where earnings growth exceeds price growth, having been below it in every month since early-2017.

The market could get a much clearer picture as to the possibility of additional BoE hikes when the Bank of England announces its latest policy decision this afternoon. Any indication in the minutes that policymakers in the UK are becoming increasingly optimistic over the outlook and ready to hike rates more aggressively than anticipated would provide good support for Sterling this afternoon. A surprise vote for a hike among the committee would also be a positive for the Pound.

News out of the Eurozone has mostly taken a back seat in the past couple of sessions with attention firmly on more significant events elsewhere. Activity in the currency bloc will pick up pace today with the release of the latest PMI data this morning.