Fed leaves market in no doubt about rate hikes

Last evening, the Federal Reserve concluded a two-day meeting and left short-term interest rates on hold. Fed Chairman Jerome Powell, seemingly undeterred by the words of President Trump gave a remarkably upbeat assessment of the performance and prospects for the U.S. economy. If anything, the wording of Powell’s comments was more hawkish than before and left traders in no doubt there will be a hike following next month’s meeting.

The dollar reacted positively to the press conference without going overboard. There are clearly issues remaining over an escalation of the trade war with the possibility that the EU may get dragged in against its will.

President Trump would no doubt say that the reason the U.S is at the front of trade “negotiations” is that China and possibly even more so, the EU have reaped the benefit of past deals and are not inclined towards change.

Following the meeting, the dollar index rose by just thirteen points on the day as Powell met but didn’t exceed the markets expectations.

As rates are expected to continue to rise in the U.S for another year, adding one hundred and fifty more basis points to rates that are already the highest in the G7, it makes plotting a path for the dollar over the next twelve months relatively simple. However, what will happen when the Fed “tops out” before others have got going?

That is a question for 2019. For now, the dollar remains a strong short-term investment.

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Rate hike today, but then what?

There is to be a rate hike in the U.K. but the questions regarding this and several other questions remain unanswered. Will this be a one-off or the start of an elongated series, how will the City react? Will Sterling commence a sustainable rally? Finally, of course, the major issue: Brexit.

It is likely that Governor Carney will call this a one-off but also say that the MPC remains vigilant on the economy and is sufficiently nimble to act as necessary.

The number of votes for a hike versus no change will be interesting. I cannot see 9-0 for a hike. It will be 6-3 or 5-4 depending, most likely, on BoE Chief Economist Andrew Haldane.

The next hike will be some way off with a cut possibly the most likely next move, if equilibrium is necessary following several outcomes that could lead to a second referendum or even a General Election

Sterling trod water yesterday, rallying to a high of 1.1258 versus the euro while falling although in a very tight range versus the dollar.

It is unusual to have such clear paths determined for major currencies, but the commencement of concerted planning by Central Banks, missing for a few years, is certainly back in fashion.

ECB talking a good game

The ECB has got both the single currency and the market just where it wants them as they have announced in no uncertain terms, that QE is about to end and there will be no hike in interest rates in the next year or so.

However, the markets attention is focused on a few issues that could still upset the well-trod path back towards 1.1000 versus the dollar. The most telling is the looming debt crisis which hasn’t been discussed, let alone acted upon. The European Minister for kicking matters into the long grass has had a busy year so far and is seeing no sign of a let-up. Debt being followed by immigration and greater integration, only a matter of time

The euro remains in a narrow range. It traded between 1.1700 and 1. 1659 yesterday, looking, very solid at both ends. Versus Sterling, the market saw a little more action ranging between 1.1258 and 1.1214, the pound winning out eventually as traders concentrated on today’s rate decision.

Longer term, as with the dollar, rates will start to converge as the Fed pauses and the ECB starts a series of hikes. That will be the catalyst for a stronger euro and a consequently weaker dollar.