Fed’s Policy Meeting Today
The US Federal Reserve (Fed) is expected to again put off raising interest rates at the conclusion of the FOMC’s two day monetary policy meeting today, with the key points of US data recently having signalled slow economic growth for the third quarter. And with central banks in China and Europe headed in the direction of more easing and deflationary pressures around, chances of a Fed rate rise announcement today are slim to none.
In Europe, the GfK survey report indicated that the German consumer confidence index slipped for the third straight month in November as mounting unemployment concerns weighed on consumers’ economic outlook. Meanwhile, there is hardly any economic data of significance in the UK today.
Pound Sterling – UK Markets
The Pound nudged lower against most of the majors yesterday after the UK’s third quarter GDP figures painted a somewhat disappointing picture of the nation’s economy. Worth pointing out, Britain’s economic growth slowed more sharply than market expectations for the July – September period on the back of construction output which had its biggest quarterly fall in three years coupled with persistent weakness in the UK manufacturing sector. However, growth in the services sector, which accounts for a lion’s share of economic activity in the UK, remained robust. The dismal UK GDP report has raised doubts that the BoE’s rate setting committee could refrain from increasing its benchmark interest rate early next year.
This morning, the Pound has failed to fully recover from yesterday’s losses against the US Dollar. Amid a light economic calendar in the UK, investor focus will be on global economic news and the US Fed’s rate decision later today for further direction. Before the close of this week, traders will also note official figures by the BoE regarding consumer credit borrowing and home loan approvals recorded in September.
US Dollar – US Markets
The US Dollar is trading in a narrow range against the shared currency this morning, as currency traders wait on the sidelines for further cues by the Fed about the timing of the interest rate rise. Heading into the conclusion of the Fed’s October monetary policy meeting, there is almost no possibility that the US central bank will today announce a rise in its interest rates. With no rate rise decision, markets will be left to pore over the monetary policy statement for any optimistic comments about financial markets stabilising or transitory weakness in the labour market, as well as any concern with regards to a strong US dollar. However, market reaction to the Fed statement might turn out to be more subdued than usual as spotlight will gradually shift towards tomorrow’s advance third quarter US GDP report as it could have a major influence on the Fed policy views moving into the December meeting.
Yesterday, softer US economic data, including durable goods orders, services PMI and consumer sentiment did not back the case for an imminent rise in key rates.
Euro – European Markets
Recent economic data releases from the Euro zone’s biggest economy have highlighted that the German economy has been remarkably resilient in the face of this autumn’s multiple challenges. Fears that the German economy will be badly battered by concerns of a slowdown in China and Volkswagen scandal seemed to have been unwarranted. The nation’s central bank or Bundesbank earlier this week advised that the macro trend for Germany remains robust. Also, concern did not show up in this week’s October update of the Ifo Business Climate Index, which measures sentiment in the German business sector. However, this optimism was not translated in today’s report on sentiment by the GfK. The consultancy’s consumer morale index weakened slightly for November, amid concerns that unemployment will rise, a worry fuelled by the influx of asylum-seekers. The data, however, had little impact on trading in the Euro against the Pound.
On similar lines, consumer confidence report in France for October also saw an easing in sentiment, but consumer and business morale in Italy topped estimates for this month.
Other Currencies – Highlights
The Aussie Dollar dropped to multi week lows against the greenback after softer Australian inflation data, released earlier today, paved the way for a further interest rate cut by the RBA and possibly as soon as the central bank’s November monetary policy meeting. Data showed that Australia’s consumer prices rose less than expected in the third quarter and the key measure of underlying inflation was way below market estimates, thus putting it at the lower end of the RBA’s target range. Australia has been steadily moving away from its dependency on the mining sector, but inflation data like this coupled with the recent decision of Australia's major banks to lift mortgage rates are likely to increase the risk of a central bank move before the year end.
Moving ahead, market attention is on the US Fed policy decision later in the day. Though expectations are for the Fed to keep its interest rates steady, investors’ interest would more be on the policy statement to gather information about the Fed’s intention to raise rates before the year end.