Fed expected to hint at December hike, Sterling rises to two week high

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1 November 2017

thomasdodds

US Dollar traders were in a cautious mood on Tuesday ahead of the latest monetary policy meeting from the Federal Reserve in the US this evening.

T
he FOMC are almost certain to keep interest rates unchanged with no economic projections or press conference scheduled. We will instead be looking for the details in the statement about the Fed’s optimism that inflation will return to target and that the labour market will recover following the September payrolls report. We think that the Fed will keep the door open to a December hike, while expressing general optimism over the recent impressive rebound in overall economic activity.

With no policy change expected this week, the market has continued to speculate on the identity of the next chair of the Federal Reserve which appears a two horse race between Jerome Powell and John Taylor. The appointment of Powell, now the apparent front runner, is unlikely to shift sentiment towards Fed rate hikes next year given his similar stance on rates with Janet Yellen.

Pound rally continues on Brexit optimism, BoE rate hike

Sterling rose to a fresh two week high on Tuesday, rallying by another half a percent against the US Dollar as investors continued to bet on a Bank of England rate hike on Thursday. EU chief negotiator Michael Barnier also fuelled optimism over a faster resolution to Brexit talks, claiming that he was ready to speed up talks with the UK. It was confirmed that Brexit negotiations will re-start in Brussels next Wednesday.

This morning’s manufacturing PMI is expected to remain unchanged for October at a relatively healthy 54.5. Attention remains firmly on tomorrow’s BoE meeting, where policymakers in the UK are expected to raise interest rates in the UK for the first time in over ten years.

Eurozone core inflation falls to lowest level in five months

The Euro was fairly range bound on Tuesday with currency traders mostly brushing aside yesterday’s inflation and growth data, which painted a mixed picture over the health of the Eurozone economy.

The Euro-area economy expanded by a better-than-expected 0.6% in the third quarter of the year, while there was also a welcome upward revision to the second quarter data to 0.7%. Growth is expected to be bolstered further in the coming months by the improving labour market. Unemployment was revealed yesterday to have fallen back to 9% from 9.1% in September.

On a much dourer note, the latest inflation numbers for October disappointed again. Headline inflation slipped back to 1.4% from 1.5%, while the core measure unexpectedly sank to just 0.9% from 1.1%. This heaps additional pressure on the European Central Bank to maintain an accommodative monetary policy next year. As we mentioned following last week’s meeting, we think that we’re unlikely to see higher rates in the Eurozone until as far out as 2019.

With no economic data releases in the Eurozone whatsoever today, the Euro will be driven almost exclusively by this evening’s Federal Reserve meeting.