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Fed’s interest rate move beating a path for others to follow?

Fed’s interest rate move beating a path for others to follow?

GBP
As expected, there was no change to UK interest rates yesterday, so the Bank of England (BoE) base rate remains at 0.25%. Kristin Forbes, who leaves the BoE at the end of June was the lone voice in voting for an immediate rate hike, citing concerns that domestic inflation pressure is increasing. The other members still considered the current policy appropriate, but some indicated that only a small strengthening in growth and inflation trends could make them push for a rate increase.

The money markets saw increasing bets on a 0.25% increase by mid-2018. The hawkish tone was stronger than expected, prompting a Sterling push above 1.2350 against the Dollar and above 1.1525 against the Euro. UK Prime Minister May ruled out a second Scottish independence referendum while EU exit negotiations were in progress. This may reduce uncertainty, but Sterling drifted lower.

USD

The US employment market is still healthy with jobless claims printing at 241k, little different from the previous week of 243k. Housing starts produced a stronger reading but was offset by a decline in building permits. The Philadelphia Fed index remained strong for March at 32.8.

Whilst overall confidence in the US outlook held firm, the Dollar was held back by reduced expectations of a rapid pace of interest rate normalisation. Today’s data releases are US industrial production and Michigan consumer confidence, but we don’t expect them to impact trading significantly.

EUR

The Euro continued to benefit from the Dutch election result during yesterday as Prime Minister Rutte’s Liberals gained the most parliamentary seats. Political risk has declined on hopes that the Netherland’s Freedom Party’s failure to win would curb support for France’s National Front. French opinion polls will continue to be scrutinised and will impact implied risk.

After the European market closed, the European Central Bank’s (ECB) Ewald Nowotny suggested that the bank may not follow the Fed’s path and could increase the deposit rate before the main refinancing rate. He also suggested that interest rates could rise before the end of the quantitative easing programme. His comments increased speculation that the ECB was moving towards a rate increase and the Euro moved above the 1.0750 level against the Dollar.

Data to watch: All day – G20 meeting and Trump/Merkel meeting. 10am EUR Trade Balance. 1.15pm US Industrial Production, Capacity Utilization. 2pm CB Leading Indicator. 3pm Labour Market Conditions Index.

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