Federal Reserve rate hikes on hold following Brexit vote

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7 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.

The Pound received some much needed respite on Wednesday, rebounding from its three decade low against the US Dollar. Sterling’s gains were limited, however, with investors continuing to fret about the growing likelihood of an interest rate cut by the Bank of England next week.

With uncertainty brewing in the UK and Europe, investors continue to pile into the safety of the Japanese Yen, which strengthened perilously close to the 100 to the USD mark. The Yen rose to its strongest position against the Pound in three-and-a-half years, further ramping up pressure on the Bank of Japan (BoJ) to intervene in the currency market in order to weaken the currency.

We think the BoJ is almost certain to announce some form of easing measures at its next monetary policy meeting at the end of the month.

Last night’s Federal Reserve meeting minutes were unusually low key given recent developments in Europe. The Fed signalled that it was in no rush to hike interest rates again in the US until it could assess the impact of last month’s Brexit.

Elsewhere in the global markets, Sweden’s Riksbank met expectations on Wednesday, leaving its interest rate and asset purchase programme unchanged at its monetary policy meeting. The National Bank of Poland also kept rates steady, hinting that it could stand pat for the foreseeable future.


Sterling rebounded from its 1985 lows, firming by 0.1% against the US Dollar on Wednesday.

We see further downside for the Pound over the next few weeks. Market pricing for a Bank of England interest rate cut at next week’s meeting approached around 80% on Wednesday. This represents an unprecedented turnaround given that only a matter of a few months ago many economists expected the central bank to hike the rate for the first time since the financial crisis this year.

Manufacturing and industrial production figures for May will be released in the UK this morning. However, with pre-Brexit data rendered almost completely irrelevant, we’re unlikely to see any significant reaction in Sterling this morning. We wait for the July PMI’s in the first week of August as the first indication of the Brexit impact on the UK economy.


The Euro edged 0.3 higher against the US Dollar on Wednesday.

Mario Draghi’s speech in Frankfurt was mostly a non-event in terms of the Euro, with no mention of monetary policy. Economic data was also limited, with flat German factory orders for May the only data of any note.

In our view, the Euro continues to look overbought at current levels, particularly against Sterling, given the growing political and economic worries in Europe. Italy’s banking system is looking increasingly fragile under a large amount of nonperforming loans, something that some analysts suggest could push the Eurozone’s third largest economy back into recession.

The European Central Bank will be releasing the accounts from its June meeting this afternoon. As with last night’s Fed minutes, this will be somewhat dated given the meeting took place prior to the Brexit vote.


A relative calmness in the markets on Wednesday limited safe-haven flows into the US Dollar, which ended 0.2% lower.

The Minutes of last night’s FOMC minutes confirmed that the Fed is carefully watching both the US labour market and the Brexit referendum, the result of which wasn’t known at the time.

In our view, these minutes indicate that there will be no further hikes until we get an indication that the weak labour report in May was a one-off and also a stabilisation in financial markets worldwide after the referendum shock.

The next major event in the US is Friday’s monthly labour report, including the crucial nonfarm payrolls data. This afternoon’s ADP employment figure at 13:15 UK time could give us a decent indication as to the strength of Friday’s number, although if last month’s report is anything to go by, this is not always the case.

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