Federal Reserve expected to keep rates unchanged despite impressive data

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27 July 2016

Written by
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

Currency markets were relatively calm on Tuesday. Today, however, is a busy day with the Federal Reserve set to announce its interest rate decision and release its monetary policy statement following its two day meeting.

W
e think the Fed is almost certain to keep its monetary policy unchanged tonight and is not expected to offer many clues as to the timing of its next interest rate hike.

The Fed is caught between the country’s improving domestic economic conditions and a lingering cloud of uncertainty in the global economy following last month’s Brexit vote. Despite June’s strong nonfarm payrolls report, we think the Fed will likely signal that it requires further evidence of an improvement in labour market conditions in the coming months before committing to its second interest rate hike since the financial crisis.

Tonight’s interest rate decision at 19:00 UK time will be released in tandem with the FOMC’s statement, the wording of the latter we think we be much more important than the rate decision itself.

We saw a stabilisation in the Japanese Yen yesterday, having sold-off heavily during Asian trading as investors dialled back their expectations of how much additional stimulus the Japanese authorities will inject into the country’s economy on Friday.

Sterling recovered from the two week low it hit following dovish comments from a Bank of England member. Meanwhile the Euro was range bound after a lack of major economic announcements in the Euro-area.

Meanwhile, the South African Rand was dealt a blow after ratings agency Fitch downgraded the country’s local currency debt rating to one notch above subinvestment grade.

The Canadian Dollar also fell to its weakest position in four months as oil prices declined for the sixth session in a row. Crude oil prices have dipped below $45 a barrel this week for the first time since the beginning of May, sending commodity currencies lower across the board.

Major currencies in detail:

GBP

Sterling touched a two week low against the US Dollar on Tuesday, although ended 0.4% higher for the day.

The Pound recovered during London trading yesterday, having fallen overnight following dovish comments from BoE member Martin Weale that suggested he’ll vote for an immediate rate cut next week. In an FT article, Weale claimed he saw things ‘rather differently’ following last week’s PMI numbers, although claimed that any policy action was unlikely to boost the economy before next year at the earliest.

This morning we got the preliminary GDP figures for the second quarter, which provided a pleasant upwards surprise. The UK economy grew 0.6% in the quarter and by 2.2% in the year. However, these figures are prone to revision and we would not be surprised if we saw this estimate lowered once more data is made available.

EUR

The single currency dipped 0.2% against the US Dollar yesterday.

Announcements out of the Eurozone were few and far between on Tuesday. With no major economic data again today, attention will be firmly on this evening’s Fed meeting. Euro traders will instead look to more meaningful announcements in the Euro-area on Friday, including the preliminary second quarter growth estimate, June’s unemployment rate and July’s inflation figures.

We think that any major negative surprises on Friday could ramp up pressure on the European Central Bank to either expand or extend the timeframe for its asset purchasing programme in the coming months.

USD

The US Dollar rose 0.3% against its major peers on Tuesday amid mostly impressive economic data in the US.

Consumer confidence in the world’s largest economy dipped slightly this month, although much less than expected. The monthly index from the Conference Board fell to 97.3 from 97.4, with sentiment among Americans seemingly unaffected by the Brexit vote. New home sales also rose to 592,000 from 572,000, adding to the stream of impressive housing data out of the US recently.

Tonight’s Federal Reserve meeting will undoubtedly be the main event in the US today. Both the interest rate announcement and monetary policy statement will be released at 19:00 UK time. Durable goods orders this afternoon are expected to remain negative.

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