Fed Raises Policy Rate, Stays on Tightening Path to Boost The US Dollar
What’s been happening?
Pound Sterling – UK Markets
Brexit headlines continued to dominate the pound sterling’s market action on Wednesday. Although the currency started the day in a calm manner, it failed to gather strength against both the euro and the dollar as a Bloomberg report caused no-deal Brexit fears to resurface. Citing an internal document, Bloomberg claimed that the EU wanted to step up the “no-deal Brexit” plans in the weeks ahead amid the rising concerns over the uncertainty regarding Brexit talks. In line with Bloomberg’s claims, German Deputy Finance Minister Joerg Kukies urged insurers to prepare for a disorderly Brexit.
Meanwhile, in a speech on Wednesday, Michel Barnier, the European Union’s chief Brexit negotiator, said that they were working for an orderly Brexit that would lead to a new partnership that respects the UK’s sovereignty as well as the founding principles of the EU, such as the integrity of the single market. Barnier also announced that he was going to have a meeting with the opposition Labour Party Leader Corbyn on Thursday. Earlier in the day, Guy Verhofstadt, a Brexit Coordinator for the European Parliament, told reporters that it was a priority for them to make sure that the UK citizens living in the EU had certainty and continued to lead their lives after Brexit as they do now.
The data released by the British Bankers' Association (BBA) showed that the gross mortgage lending for the total market in August fell by 1.2% on a yearly basis to £24.1 billion. Commenting on the data, “remortgaging continued to dominate in August, as homeowners took advantage of a competitive market to lock into attractive deals, Peter Tyler, Director, UK Finance, said and added: “However, the overall economic outlook remains mixed as household incomes continue to be squeezed by rising inflation.”
US Dollar – US Markets
The data released jointly by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development on Wednesday showed that new home sales increased by 3.5% on a monthly basis in August following July’s 1.6% contraction and surpassed the analysts’ estimate of 0.5%. Nevertheless, investors largely ignored this data as they remained on the sidelines ahead of the FOMC announcements.
In a widely expected decision, the FOMC hiked the target range for the federal funds rate by 25 bps to 2% - 2.25% range. The updated dot plot showed that the committee was expecting one more rate hike in 2018 while seeing three more rate increases appropriate in 2019. Moreover, the economic projections revealed that the GDP growth expectations were raised to 3.1% from 2.8% in 2018 and to 2.5% from 2.4% in 2019 while PCE inflation forecast was revised down to 2% in 2019 from 2.1% seen in the previous publication.
The CME Group FedWatch Tool’s odds for another 25 basis points hike in December rose to 80% on Wednesday from 75% seen on Tuesday. However, the initial market reaction to the FOMC’s publications weighed on the dollar as markets assessed the fact that the FOMC removed the phrase “the stance of monetary policy remains accommodative” from its policy statement as a dovish shift.
While responding to questions in the press conference, however, Chairman Jerome Powell clarified that the change in the language didn’t necessarily mean a change in the rate outlook and allowed the dollar to quickly recover its losses. Commenting on Trump administration’s trade policy, Powell said that the impact of tariffs was still relatively small and added that high consumer and business confidence were boosting the economic growth. After fluctuating wildly during the press conference, the US Dollar Index, which tracks the greenback against a basket of six major currencies, closed the day with modest gains.
Euro – European Markets
The data published by the German Federal Statistics Office on Wednesday showed that Germany’s overall public debt declined by 2.3% to €1.93 trillion to record its lowest reading in more than seven years. Meanwhile, in an interview with Reuters, the ECB’s chief economist, Peter Praet, said that the base case scenario for inflation was conditional on the “easy monetary policy” and the financial conditions and further added that the interest rate curve was fully coherent with the bank’s objective. The shared currency was virtually unchanged against both the dollar and the euro at the end of the day.
What’s coming up?
UK: There won’t be any macroeconomic data releases from the UK on Thursday. The Bank of England MPC member Andrew Haldane will be delivering a speech at 11:45 GMT.
US: Weekly initial jobless claims, the final Q2 GDP growth, which is expected to stay steady at 4.2% on a yearly basis, durable goods orders, and pending home sales will be featured in the U.S. economic docket.
EU: The European Commission’s sentiment report that includes services sentiment, consumer confidence, industrial confidence, and business climate indexes, will be published on Wednesday. Moreover, the Statistisches Bundesamt Deutschland will release the preliminary inflation report for September in Germany.