Federal Reserve to stand pat on interest rates, hint at two more hikes

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1 August 2018

thomasdodds

The Federal Reserve will be meeting in the US tonight, with currency traders waiting to see whether the central bank will signal that at least one more interest rate hike is on the horizon this year.

P
olicymakers in the US last raised rates in June and are widely expected to hike again in September and December, when the FOMC releases its economic projections. With the Fed therefore all but certain to hold policy steady today, the language used regarding inflation and the looming trade war will likely be of more importance for the US Dollar. We expect another upbeat assessment of the economy that strongly hints at two more rate increases, while also highlighting the risk posed by recent protectionist rhetoric.

In the lead up to this evening’s Fed policy announcement, this afternoon’s ADP employment number could give us a decent idea as to the strength of Friday’s nonfarm payrolls figure.

Eurozone growth slows in second quarter

Tuesday’s preliminary second quarter growth figures out of the Eurozone knocked the Euro off its highest level in over a week against the US Dollar yesterday. The currency bloc’s economy expanded by just 0.3% in the three months to June, stuttering to its lowest level in two years. On a year-on-year basis, the economy grew by 2.1% which, while still fairly healthy, is its softest print since the first quarter of 2017. Worries over the bloc’s future trade relationship with the US knocked consumer confidence, while exports themselves slowed on a quarter previous. The overall slowdown is somewhat concerning, given many economists anticipated the soft patch in activity in the first quarter to prove temporary.

Meanwhile, the latest inflation data surprised to the upside, although this wasn’t enough to prevent the Euro ending the day lower. The headline rate of inflation increased to 2.1% in July, primarily due to higher global oil prices. The core measured remained at just 1.1%, still well below the levels that we think the ECB will need to see before it begins discussing higher interest rates.

Sterling unchanged ahead of Bank of England rate decision

Sterling ended unchanged against the US Dollar over the course of trading yesterday, with investors counting down until Thursday’s BoE meeting. As we mentioned yesterday, we expect the bank to hike tomorrow, while reiterating that an ‘ongoing tightening of monetary policy over the forecast period would be appropriate’, although at a gradual pace. The bank will continue to highlight the major risks posed by Brexit, and Governor Carney will probably reiterate that the Brexit negotiations will be the biggest driver of interest rates in the UK.

In the meantime, this morning’s manufacturing PMI could shift the Pound. Absent any surprises here, all eyes will be on the Fed and Bank of England policy announcements.