Market News & Insights
19 March 2018

Monetary Policy Dominates Volatile Markets

Last week was a quieter period for the major currencies, as markets were perhaps gearing up for the week ahead which could be a volatile one. Markets will be focusing on two monetary policy meetings this week, the UK and US respectively. First up is the Federal Reserve meeting on Wednesday, where the new man in the job, Jerome Powell, will take the reins from departing Chair person, Janet Yellen. The most likely outcome for the meeting will be a 25 basis point hike for the US – which has been all but priced in – and a forecast of two further rate hikes or possibly three. We saw equity markets panic earlier this year on the notion of four rate hikes, however with the recent political headlines from Donald Trump and his protectionist trade policies, investors are now weary of the repercussions on both the US and global economy, therefore easing concerns around this faster than anticipated steepening of the US treasury yield curve.

For the UK meeting, there will certainly be less of a focus as interest rates are very likely to remain at the 0.5% mark. Markets are expecting a more hawkish tone from the Bank of England after the interest rate announcement and any indication that a rate hike might be likely later on this year could give the pound a welcome boost. Markets are currently pricing in a 70 percent probability of a May hike.

As well as these two key meetings, the UK has important inflation data out on Tuesday, which is forecast to fall to 2.8% – a welcome fall for the Bank of England as the burden to raise interest rates will begin to reduce as the current inflationary pressure will be nullified. It is likely to be a soft week again for the euro but still a couple of data releases to look out for in Germany; ZEW business data is expected to worsen from 92.3 down to 90, while on Thursday, IFO Business survey data is forecasted to fall from 115.4 to 114.7. European consumer confidence is also due and expected to fall slightly from 0.1 to 0. With all of this in mind, the single currency is likely to have little upside this week unless other majors have a very difficult week – which may be possible with the two big policy meetings happening in the coming days.