Fed sticks with three hikes

FOMC disappoints with dovish comments

As expected, the U.S. Federal Reserve raised interest rates by 25bp yesterday evening. The dollar reacted poorly to the tone of the accompanying statement, which stuck to the existing projection of three hikes in 2017. More compelling evidence will be needed, in particular of President Trumps intentions regarding economic stimulus, before they change to a more hawkish position.

The dollar index fell by more than 1% to a multi-week low of 100.49.

In the address following the decision, Janet Yellen commented that “We have seen the economy progress over the last several months in exactly the way we anticipated.. “We have some confidence in the path the economy is on.” In other words, she is saying, “we are more on the ball than the market realises so stop second guessing us and believe it when we provide advance guidance” but it is in the psyche of traders to be a little skeptical of Central Bankers, always believing that they have something more ‘up their sleeve’.

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Euro relief rally as Rutte triumphs

The Euro gained 1.2% against the overall weaker dollar following the victory for incumbent Prime Minister Mark Rutte in the Dutch General Election.

In addition, the vote was seen as a test of the rise of populism following the Brexit vote and Trump’s victory. The jury will remain out on this subject until the French election in just over a month’s time. In the event that Marine le Pen performs strongly and wins the most votes in the first election the possibility of a run-off victory on May 7th increases. This could see the single currency coming under increasing pressure.

The difficulties facing the ECB are perfectly illustrated by the release yesterday of several indicators of economic activity and inflation for individual Eurozone member states. Not only is the data universally weak, it also suffers in contrast to Germany where the economy is in danger of overheating with inflation rising at 0.2% per month over the past few months.

China hikes, Japan holds. U.K. & Swiss decisions to follow

In a move designed to tackle debt risks that are growing in the Chinese economy, the Bank of China hiked interest rates overnight. The Australian dollar, the markets proxy for Chinese events, fell by 0.3%, also affected by weak employment data.

In the U.K. much political capital was gained by the opposition parties as the Government was forced to perform a U-turn over one of last weeks major Budget announcements. With attention to the furore that had erupted following the announcement of a hike in taxes for self-employed people, the Prime Minister announced that there would be no such tax hike before the next General Election.

The pound which had pulled away from the low of 1.2110, seen on Tuesday, traded up 0.3% on the day at 1.2267.

The interest rate decision will be made today following the MPC meeting. Not only will the markets expectations be fulfilled by no change, but their interest will be piqued by the vote. Any dissenting voices calling for a hike could undermine the pound, which remains vulnerable.

The Japanese Central bank has left rates unchanged as was widely expected as will the Swiss later today. These are the “safe haven economies” where funds flow in times of uncertainty and upheaval. They both have ultra- easy monetary policy which shows no sign of changing.