Fed's Dot Plot Shows No Rate Hike in 2019, Dollar Weakens Sharply
What’s been happening?
Pound Sterling – UK Markets
The British pound fell to its lowest level against the euro in a week and posted modest losses against the dollar despite a decisive recovery witnessed in the second half of the day. During the PMQs on Wednesday, British Prime Minister Theresa May announced that she had written to European Council President Donald Tusk informing him that the UK was seeking an extension to Article 50 until June 30 while reiterating that it wasn’t in the UK’s interest to take part in the European Parliament election. Responding to May’s remarks, European Commission President Juncker’s spokeswoman told reporters that Juncker warned May that the withdrawal has to be completed before May 23 or the UK must hold European Parliament elections.
The UK’s Office for National Statistics on Wednesday reported that inflation, as measured by the Consumer Price Index (CPI), rose 0.5% on a monthly basis in February and ticked up to 1.9% annually in February. “Rising prices for food, alcohol and tobacco, and across a range of recreational and cultural goods produced the largest upward contributions to change in the rate between January and February 2019,” the ONS said in its publication. The core CPI, which excludes volatile food and energy prices, edged down to 1.8% annually to fall short of the market expectation of 1.9%. Other details of the report revealed that the Producer Price Index and the Retail Price Index rose 2.2% and 2.5% on a yearly basis, respectively.
US Dollar – US Markets
The US Dollar Index slumped to its lowest level since the first week of February as the greenback came under heavy selling pressure after the Federal Open Market Committee released its monetary policy statement and the economic projections from the March 19-20 meeting.
As expected, the FOMC announced that it left the benchmark interest rate unchanged at the target range of 2% - 2.25%. “Recent indicators point to slower growth of household spending and business fixed investment in the first quarter. On a 12-month basis, overall inflation has declined, largely as a result of lower energy prices; inflation for items other than food and energy remains near 2 percent,” the FOMC noted in its statement. Meanwhile, the updated dot plot revealed that the number of expected rate hikes in 2019 fell to 0 from 2 in December’s dot plot and to one in 2020. Regarding the balance sheet strategy, the Fed explained that it intended the balance sheet runoff to slow beginning in May and end in September “provided that economy, money market conditions evolve as expected.”
During the press conference, Jerome Powell, Chair of the Board of Governors of the Federal Reserve System, said that despite the downgrades in the economic projections, the Fed was still expecting the U.S. economy to grow at a solid pace in 2019 and reiterated that Brexit and trade conflict with China was posing risks on the economic outlook. “It could be some time before the outlook calls for a change in policy,” Powell added.
Euro – European Markets
The shared currency advanced to its highest level in more than 6 weeks vs the dollar and gained more than 1% against the pound sterling as the currency found demand with investors reacting to Brexit uncertainty and the Fed’s dovish shift. According to the monthly data published by Destatis, the Producer Price Index in Germany declined by 0.1% on a monthly basis in February to miss the market expectation of 0.2% and kept the annual rate unchanged at 2.6%.
What’s coming up?
UK: The UK’s Office for National Statistics will publish the February retail sales data on Thursday. More importantly, the Bank of England will announce its interest rate, which is expected to stay unchanged at 0.75% and release the policy statement.
US: The weekly initial jobless claims and Philly Fed Manufacturing Survey will be featured in the U.S. economic docket.
EU: The European Central Bank will release its monthly economic bulletin on Thursday before the European Commission publishes the consumer confidence data later in the day.