How can the Fed still be hawkish?
Sterling managed small gains versus the Dollar and Euro despite Mark Carney again ruling out an early rise in interest rates from 0.5%, where they have been stuck since the financial crisis. He was asked if the decision by the US to start tightening monetary policy in December was cause for the current market volatility, to which he said it was a “contributory factor”. Carney also mentioned that Britain may struggle for credit in the event of a “Brexit”, saying “the global general environment has become much more febrile, much more volatile, and relying on the kindness of strangers is not optimal in that kind of environment”.
The UK government signalled its interest in holding the referendum in June by publishing the conduct regulations for the referendum in parliament. David Lidington, the Europe minister, also signed a commencement order meaning that the EU referendum act can formally come into force and open the process for the registration of EU referendum campaigners. “If we get a deal done in February it will be possible to hold a referendum in June if we choose to do so,” said Philip Hammond.
David Cameron is positive on his chances of securing us a better “Euro” deal after speaking with Angela Merkel, who told him there was genuine goodwill across Europe for his intentions. We are also seeing an increase in “pro-Britain in Europe” statements being reported which is reducing the negative sentiment Sterling has suffered from in recent weeks.
Market focus is back on the Fed today, despite it being unlikely that there will be a change to rates. The committee are widely expected to keep the benchmark lending rate unchanged for now, though the accompanying statements will be eyed for any forward guidance.
The Fed are in a tricky position whereby they need to acknowledge the recent market turmoil and its impact, while trying to re-focus investors’ attention on mandate-relevant fundamentals and establish the possibility of tightening in March. If the Fed opt to leave their hawkish rhetoric in place then the Dollar will strengthen from the reaffirmed confidence that the central bank will show. On the other hand if there are hints that the US will not manage it’s forecasted four further rate hikes it could be interpreted as the Fed having moved too soon in December; expect a Dollar sell-off.
Data to watch: 3pm US New home sales. 7pm US Fed Monetary policy statement. US Fed Interest Rate decision.