Market News & Insights
22 March 2018

Fed Mixes Between Dovish & Hawkish

Yesterday evening all eyes were on the US Federal Reserve’s FOMC interest rate decision. Meeting for the first time under Chairman Jerome Powell, further highlighted the importance of an already important market event, as this could set the tone for the start of Powell’s reign. As fully expected and priced in, they raised the benchmark lending rate by 0.25% (Fed funds target range now 1.5% – 1.75%) and forecast a steeper path of hikes in 2019 and 2020, citing an improving economic outlook. Initially this could have been interpreted as setting a more hawkish policy path. However, Fed policy makers were less decisive on the path of interest rates this year. Seven officials projected at least four quarter-point hikes would be appropriate this year, while eight expected three or fewer increases to be warranted. This swung the tone of the meeting back towards the dovish side and as a result the dollar was sold off.

The softer dollar was further pushed lower with US President Trump demanding attention with news breaking that he is about to implement trade tariffs against China later today. As a result, markets generally are nervous with much of the European bourses opening in the red this morning after the US bellwethers, the S&P500 closing down 0.45% and the NASDAQ 0.47% lower.

Closer to home now and yesterday was potentially another significant one for the UK economy with the further release of key economic data that we flagged in yesterday’s commentary. Following on from Tuesday’s falling inflation rate of 2.7%, yesterday we also had wage data which showed an increase in earnings at 2.8%. Using this basic crude metric, this shows that real UK wages are finally growing. This was also released with further positive employment news, with the ILO Unemployment Rate falling further to 4.3%. Naturally this helped sterling along its current run. Versus the single currency, EURGBP continued to fall breaking the .8730/.8740 support line (GBPEUR 1.1454) but failing to test either the .8700 mark or the low of the range in place since September 2017.

Later today we also have the Bank of England monetary policy meeting but unlike last night’s Fed, it’s not expected to hike rates or make any changes to the size of its asset purchase program. However, as always investors will be looking for clues regarding the timing of its next hike. Back in February, BOE Governor Mark Carney startled markets by saying that monetary policy will need to be tightened “somewhat earlier” and “by a somewhat greater extent” than the roughly two-and-a-half hikes over three years that were already priced into the market. The hawkish remarks led to a quick re-pricing of the odds of a hike in May (now priced at a 70 percent probability) as well as causing investors to cement the three full hikes that were priced in until 2020.