USD Rate Drops 2c on Interest Rate rise

15 December, 2016

Robin Haynes

The Federal Reserve last night increased US interest rates by 0.25% to 0.75%, and although the move was widely anticipated, the US Dollar gained in price on the strength of the accompanying updated 3-year economic forecasts for the USA. Chairman Janet Yellen said the rate rise “should certainly be understood as a reflection of the confidence we have in the progress that the economy has made and our judgment that that progress will continue”

The Fed now expects interest rates to rise another three times in 2017, rather than the two previously expected, and set bullish predictions for growth, unemployment and inflation figures. This sent the GBP-USD exchange rate down by nearly 2c immediately after the 7pm announcement. There was some caution however at making firm predictions amid the uncertainty surrounding the likely economic policy of the incoming Trump administration, with ‘Make America Great Again’ perhaps not seen as the most definite or carefully planned economic strategy in recent memory. The election result so far, however, has not dampened economic prospects in the States, with stock markets trading well and consumer confidence high. Mr Trump’s likely policies are certainly an influence in the Fed’s thinking on interest rate rises through 2017.

So the US Dollar rate, which has been slowly rising since October, has taken a fall back, but still only to where it was at the beginning of December for those of you buying US Dollar-denominated goods or property.

Unemployment stays flat
At home yesterday, UK unemployment remained flat at 4.8%, with a slight drop in claimant numbers, while average earnings were up 2.6% in the year to October. After Tuesday’s higher inflation figures, the UK economy appears to be faring well if not spectacularly, and the Pound’s reaction was muted. For the UK and the Pound it seems that all bets are off until we have some progress on Article 50 and the likely shape of the UK’s EU exit next year. This morning we do have retail sales at 9.30 to add more colour to the picture.

Bank of England meets today
More importantly today, the Bank of England announce interest rate policy and the associated Monetary Policy Committee minutes, at midday. We are extremely unlikely to see interest rates move from the current 0.25% level, but the minutes always have the potential to move exchange rates as we look for clues as to any potential interest rate rises next year. This afternoon sees US inflation figures to finish off a busy day, and with Eurozone inflation to follow tomorrow there is plenty to provide exchange rate volatility leading up to the last business week before Christmas.