Market News & Insights
15 June 2017

Fed V Inflation – One Up/One Down

Yesterday evening as expected, the US Fed FOMC delivered another rate hike bringing rates there to 1 – 1.25%. As we flagged previously, such a move will have limited market impact and that the focus will be on their economic outlook and plans for reducing their balance sheet. On these fronts, Chair Janet Yellen certainly delivered plenty of information. The overriding theme we took from the meeting is that Yellen is planning to plough ahead with normalising Monetary policy despite recent inflation as she bets that the ongoing strength of the labour market will ultimately prevail. She stated that “it’s important not to overreact to a few readings, and data on inflation can be noisy”. The inflation trends we are referring to stem from a release earlier in the day yesterday that showed the US Consumer Price Index falling to 1.7% away from its 2% goal and following a falling trend of 2.1% to 1.9% in prior months.

In a separate statement on Wednesday, the Fed spelled out the details of its plan to allow the balance sheet to shrink by gradually rolling off a fixed amount of assets on a monthly basis. The initial cap will be set at $10 billion a month. They didn’t reveal how large the portfolio might be when finished, nor the exact timing of when the process will begin this year, though Yellen told reporters it could get underway “relatively soon” if the economy performs as expected.

This week is a busy one for leading central banks and is also one for key inflation data with the latest UK rate in contrast to the US rising to 2.9% on Tuesday. In addition, yesterday’s morning UK wage inflation showed average weekly earnings now only rising 2.1% which confirm negative wage growth that we alluded to in yesterday’s commentary.

Later today, it’s also the turn of the Bank of England to step up. Unlike their US counterparts, we haven’t placed as much weighting on the event with the only potential market moving variable being any change to voting pattern of Monetary policy in light of the recent inflation data. Previously MPC members voted 8-1 to keep rates on hold but should that start to change, current market expectations of a rate hike towards the tail end of 2019 might start to shorten. Naturally this could have a supportive impact on the pound.

In response to last night’s Fed meeting, overall currency markets were relatively muted. The US Dollar did experience some pick up in volatility in the immediate response but generally the USD recaptured the ground lost post the inflation release. After pushing up to a 1.1281 high, EURUSD has responded by giving back an almost one cent since, now back at 1.1190 currently. Support at 1.1110 continues to stand for now. Similar GBPUSD gave back the gains and sits this morning at 1.2722.