Federal Reserve on course for 2016 rate hike

28 July, 2016

Rob Bastin

As July draws towards its business end, the currency markets have been far more stable and calm than has been seen in previous weeks. The post referendum volatility has died down and the markets find themselves consolidating having recovered a portion of the losses seen a month ago. This is largely due to an absence of key indicators and new post-referendum information for traders to go on, and has therefore seen key pairs such as GBP/EUR and GBP/USD, trade within a 2 cent range for nearly 2 weeks now. This is considered a prolonged period for the markets to be in this current state so it is very likely that we will see rates starting to move again very soon. For Sterling markets the big concern is the likely monetary easing from the Bank of England due to be announced next Thursday, and the likely pricing in of this expectation from as early as Monday.

Yesterday did see the release of some revised Q2 GDP figures for the UK, which actually came in better than analyst’s forecasts showing that the UK economy grew by 0.6% in the 3 months leading up to the referendum vote, an upward revision from the initial figure of 0.4%. Normally speaking this would shed positive light on the pound but with the UK voting to leave the EU at the end of June, it is now the Q3 growth figures that are all important, and so far these are expected to contract by as much as 0.5%. With all this in mind Sterling failed to see any improvement despite the good data.

As the UK session closed, focus switched to the US as the Federal Reserve made their July interest rate decision announcement. Interest rates were held at 0.5% very much as expected and so the markets were looking for any indicators of future rate changes within the accompanying statement. The assessment of the current economic conditions were more upbeat than previous stating that any near-term risks to the economy have now diminished, and indicated that one more interest rate hike this year was still on the table. Despite this positivity the US Dollar failed to make any gains, and in fact weakened against both the Euro and the Pound following the statement, perhaps due to the lack of clarity around the timing of this potential hike.

Today is another quiet day on the economic calendar with just Euro-zone confidence and sentiment figures at 10am, followed by US jobless claims and Goods Trade balance at 1:30pm this afternoon. This releases are however unlikely to have any major market impact.