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Fed statement causes volatility and scramble to reposition

Fed statement causes volatility and scramble to reposition

After the Fed hinted at their intentions to move ahead with tightening as soon as possible, market participants have scrambled to rebalance their portfolios in a way that will allow them to take advantage of this development should it take place in December. Yesterday pretty much revolved around the lower than expected US GDP and its implications for the Fed’s agenda.

The core personal consumption expenditure price index, the Fed’s preferred inflation measure, will be released this afternoon and is expected to show the biggest monthly increase since last November. Shortly after that the Fed’s Williams is scheduled to speak and will be the first after the hawkish Federal Open Market Committee (FOMC)  statement. Given his profile, we expect him to back a December rate hike and that is likely to push the Dollar higher across the board.

Sterling pushed higher against the Dollar yesterday, taking advantage US GDP figures, immediately jumping from 1.5244 to 1.5303 on release of the data. Having reached 1.5340 by market open this creates an interesting situation for Cable as it is now unclear whether it will be able to rally even higher or this jump was just a technical correction.  Versus the Euro, Sterling smashed through the 1.3900 mark and has held gains despite a volatile trading session.

Popular opinion holds that the Bank of England  (BoE) would rather follow the lead of the US in rate hikes, thus any Fed rate talk causes speculation that the UK will follow. It’s widely held that GBP will trend higher ahead and after the first UK interest rate rise; the size of the gain is where the debate is to be had. Unless we see a further drop in commodity prices, economists think UK inflation hit the bottom in September, “as inflation bottoms out and a BoE rate hike moves closer, we expect GBP to trade gradually higher over the medium term.”

There was a surprising increase in economic confidence across Europe yesterday as the sentiment indicator crept up to 105.9 from 105.6 previous. German inflation data also returned to positive territory, just. However, release of the current  Eurozone inflation figure could diminish any positive price action for the Euro. Inflation fell back into negative territory last month, and a year into the quantitative easing programme the markets are only forecasting an increase to 0.0% this month. This is far from the 2% target. The European Central Bank are very likely to act in December now, just how drastically will be dependant on how strong the disinflationary data is from now till the end of the year.

Today’s data releases: 10am Euro CPI & Unemployment rate, 12.30pm US core personal consumption expenditure price index and at 1.45pm Chicago PMI.

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