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Fed Rate Rise minutes not all Bullish?

Fed Rate Rise minutes not all Bullish?

Last night’s Federal Open Market Committee minutes indicated that the Fed do intend to hike rates by 25 bps four times in 2016. It had stressed however that economic conditions that will justify the hikes had to be gradual and data dependent. The minutes also confirmed that they do see inflation rising to its 2% target.

“Participants emphasized the need to adjust the policy path as economic conditions evolved and to avoid appearing to commit to any specific pace of adjustments,” according to the details published last night. The minutes also drew attention to other downside risks to inflation such as shock from oil prices and continuous rise in the value of the US Dollar. It is also feared that the strengthening in the labour market will not be sufficient to offset the impact of the persistent global disinflationary forces.

China again was the centre of attention last night as the People’s Bank of China (PBoC) devalued the Yuan yet again; the currency is now at its lowest point since 2011. We have also seen Chinese Stock Exchanges shut within 15 minutes of opening after prices dropped by 5% under the new “Circuit Breaker” rules.  Such actions will no doubt affect the Fed’s decisions and forecasts going forward. As with last August, such events like that in China can influence how the Fed will act. The US hike was held off due to the Chinese stock market crash and the global uncertainty it caused. The course of hiking rates may be slightly slower than has been forecast by the Fed, until issues in China can be alleviated, if at all.

The events in China are likely to dictate market sentiment this morning too; safe haven flows are evident in Gold, Yen, Euro and Swiss Franc. Consequently the Euro has broken back into 1.35 range against the Pound. Eurozone unemployment is expected to remain at 10.7% having declined steadily from its peak over the last couple of years. Retail sales in the Eurozone are expected to have increased by 0.2% in November, up 2% on the same month a year earlier, possibly promoting a rebound in EURUSD.

George Osborne is due to speak in Cardiff today and the tone is likely to be starkly different from the upbeat Autumn Statement. It is expected that he will warn of global risks to the UK economy such as a steep drop in share and commodity prices, the oil market woes, rising tensions in the Middle East, recessions in Brazil and Russia and North Korea’s nuclear claims.  All this doom & gloom is unlikely to aid Sterling’s cause when we’ve already opened at 1.3532 vs EUR and 1.4589 vs USD.

Data to watch: 10am Euro Unemployment Rate. 1.30pm US Continuing and Initial Jobless Claims. 10.30pm AUS AiG Performance of Construction Index (Dec). 12.30am (8th Jan) AUS Retail Sales (Nov).

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