Markets Await Fed Interest Rate Decision

14 December, 2017

Simon Eastman

Yesterday markets were waiting for the Fed interest rate decision due at 7 pm UK time, where Janet Yellen was to give her final speech as Chair of the FOMC. It was also widely expected that we would see an interest rate rise as markets had for some time expected December to be the next raise, ahead of another two rate rises in 2018.

During the afternoons’ trade we had US inflation results though, which comes in under forecast, slowing to 1.7 percent could have put a dampener on the chance of a rate rise, leading the way for US dollar weakness through the afternoons trading. Interest rates are the main tool for manipulating inflation, with rate rises used to curb inflation and rate cuts used to bolster it. With inflation dropping, why would the Fed feel the need to raise rates again, pushing the level further away from the 2 percent target?

Fed Interest Rate Decision

As expected, the Fed did raise interest rates last night by 25 basis points, while hinting there would be more hikes next. Speculation suggests we might be looking at a further 3 hikes over the year, despite inflation dropping. Janet Yellen, in her swan song speech through up no surprises, while stating the Fed would not be discussing changes to the inflation target. She did, however, mention that if there was a shock to the economy, there was scope to cut rates as well as other tools like asset purchase. As a result of the report, the dollar weakened slightly but nothing significant.

Elsewhere Yesterday

Despite awaiting the main event all day, elsewhere yesterday we did see some key releases from the EU and UK. Firstly the German inflation figures were released, coming out as expected at 1.8 percent giving way to some early euro strength. This was followed by employment figures from the UK and EU. The UK showed a mixed bag, with the unemployment rate rising above forecast, while average earnings increased and the number of people claiming jobless benefit decreased nearly 3000 more than analyst expectations. The EU employment figure was unchanged in line with forecasts leading the way for the pound to rally somewhat across the board, taking a half a cent from both the euro and US dollar.

The Day Ahead

After the heavy data day yesterday, today is no different. For anyone sending money to Switzerland, we have the Swiss National Bank interest rate decision at 9 am. Elsewhere we have Markit manufacturing and services PMI for Germany and the EU as a whole, while the UK sees the results of Novembers retail sales. All these come ahead of the Bank of England interest rate decision, minutes and policy statement at midday, before the European Central Bank meet 45 minutes later with their interest rate decision and update on their asset purchase facility. Will they cut the program short as previously thought they might, or will it remain unchanged?

After lunch, the US release retail sales before we listen to Mario Draghi and the ECB policy statement and press conference at 1.30pm. This usually lasts about half an hour and will give key insight into the ECB’s thinking and policy direction going into 2018, so expect some volatility for certain. Finally, the US release Markit manufacturing and services PMI at 2.45pm before the day concludes with a speech by Canadian Governor Poloz as the day comes to a close at 5.25pm.

That is somewhat of a hectic day following fresh on the heels of the Fed meeting last night so expect a lot of volatility today as traders digest the data and eco speeches throughout the day. Anyone with a transfer to make this side of Christmas, may like to emulate one of “The 3 Wise Men” and tie it all up ahead of the day’s proceedings.