Federal Reserve to raise interest rates, release latest ‘dot plot’

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13 December 2017

thomasdodds

The Federal Reserve in the US is almost certain to raise interest rates at its December meeting this evening, the third rate hike in the country in 2017.

R
ecent economic news out of the US has been impressive. The world’s largest economy is now growing at its fastest pace in three years, while the labour market has shrugged off the recent downside effect brought about the September hurricanes. The latest communications from Chair Janet Yellen have also been hawkish and the market is now viewing a hike at tonight’s meeting as a nailed on certainty.

With that being the case, the Dollar will instead be driven by the release of the latest ‘dot plot’ and accompanying rhetoric from policymakers. We think the dot plot will be mostly unchanged from the September meeting, suggesting that the Fed remains on course to hike on three or possibly even four occasions in 2018, the confirmation of which could support the USD today.

In the build up to today’s FOMC meeting, we’ll have the release of the latest set of inflation figures for November, which are expected to show that consumer price growth accelerated to 2.2% last month from the 2% recorded in October.

Sterling slips ahead of Bank of England meeting

Sterling received only brief support from yesterday’s higher-than-expected inflation data, ending the session back just above the 1.33 mark against the US Dollar and around its lowest level since late-November.

Headline inflation in the UK unexpectedly rose again in November, climbing to 3.1% from 3.0%, despite the Bank of England’s claim that it would likely peak in October. Sterling’s negative reaction to the news may be due to the impact this will have on real earnings. Real wage growth now stands at -0.8%, which could prove a catalyst for lower growth in the UK in the coming months.

The next couple of days could prove to be an equally busy one in the UK. Ahead of tomorrow’s Bank of England meeting, the ONS will be releasing its October labour report at 9:30 UK time. Unemployment is expected to fall to a fresh four decade low 4.2% while, arguably more importantly, we could get an indication that wage growth is accelerating again. Both would prove positive for the Pound today if they surprise to the upside.

Euro sinks on Fed expectations, weak sentiment data

The Euro sank by around half a percent against the US Dollar during early afternoon trading on Tuesday as investors continued to bet that the Federal Reserve would raise interest rates in the US this evening. The monthly economic sentiment data from ZEW was also less than impressive. Sentiment in Germany fell to 17.4 from November’s 18.7, which could be attributed to some of the softness in the currency yesterday.

Revised inflation data for Germany this morning could shift the common currency if it materially deviates from consensus. Euro traders will, however, be more concerned with the Fed meeting this evening, while also having one eye on Thursday afternoon’s European Central Bank announcement.