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Fed hikes again

Fed hikes again

GBP
Consumer prices rose 0.4% in May and the inflation rate held at 2.4% as expected. The core inflation rate also held at 2.1%, although there was strong upward pressure on producer input prices with a 9.2% annual gain triggered by higher oil prices and Sterling weakness. Market speculation that the Bank of England would hold interest rates in August increased after the data and the Pound lost ground as yields declined, with the Euro strengthening to near 1.1340.

The government avoided defeat in the House of Commons despite a theatrical performance all round, and Sterling regained ground in US trading hours. Concerns of a weak Brexit negotiating position were significant in limiting support for the Pound. The Euro closed above 1.1365 and Sterling fell to lows near 1.3320 against the Dollar after the Federal Reserve (Fed) raised interest rates, but recovered to near 1.3400. The UK RICS house-price index improved to -3 from -7 in April, but investors shrugged it off.

USD

Overnight, the Fed increased interest rates by 0.25% to 1.75-2.00%, in line with market expectations. The statement made references to solid economic growth with strong gains in employment while inflation had moved close to 2%. Overall risks to the outlook were, again, considered balanced with further gradual increases in interest rates expected.

Inflation and growth forecasts were revised slightly higher and median projections showed that a total of four rate hikes were expected for 2018 compared with three at the March meeting, although individual forecasts changed only slightly. In his press conference, chair Jerome Powell echoed Mr Trump in saying “The main takeaway is that the economy is doing well”.

EUR

The Euro again found support below 1.1750 against the Dollar with little impact from weak Eurozone production data. The Euro declined to lows just below 1.1730 before reversing course and heading back to the 1.1800 area with short covering a feature ahead of the European Central Bank (ECB) policy decision.

Today’s ECB meeting is not expected to bring policy changes, more likely only policy options will be discussed with the Central Bank keen to see more data. Investors have not completely ruled out expectations of a QE tapering announcement today and expect that the staff macro projections are likely to show a slight downward revision of near-term growth and an upward revision to headline inflation.

Data to Watch:

24h EUR EcoFin Meeting
07:00 EUR Harmonized Index of Consumer Prices (YoY) (May)
07:00 EUR Harmonized Index of Consumer Prices (MoM) (May)
09:30 GBP Retail Sales (MoM) (May)
09:30 GBP Retail Sales (YoY) (May)
09:30 GBP Retail Sales ex-Fuel (YoY) (May)
09:30 GBP Retail Sales ex-Fuel (MoM) (May)
12:45 EUR ECB Deposit Rate Decision
12:45 EUR ECB Interest Rate Decision
13:30 USD Retail Sales (MoM) (May)
13:30 USD Retail Sales ex Autos (MoM) (May)
13:30 USD Retail Sales control group (May)
13:30 USD Initial Jobless Claims (Jun 8)
13:30 USD Continuing Jobless Claims (Jun 1)
13:30 EUR ECB Monetary policy statement and press conference
23:30 NZD Business NZ PMI (May)

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