Rate debate contines as Fed meeting starts

September 16th: Highlights

• Fed start 2-day meeting
• US inflation data will add to rate debate
• UK inflation confirmed at zero
• UK employment data due today

Sterling Comment

Cable broke below 1.5350 after CPI inflation data dampened debate of an earlier than expected BoE rate rise. Data confirmed that our domestic price pressures remained neutral, with no increase in inflation in the 12 months to August. Inflation is the key data point considered for interest rate policy adjustments and is likely to outweigh considerations from an improving labour market. Until there is a clear trickle-down from wage increases, it is unlikely the BoE will rush to raise rates, especially with the continued uncertainty and concerns with Chinese and global growth prospects.

GBP/USD is currently trading trades at 1.5390 and GBP/EUR is around 1.3695

Global Comment

So today is the day! The Fed will start their two-day meeting, after their summer break in August. Market sentiment is still deeply divided over what the outcome will be tomorrow. The US economy has delivered some pretty bearish data, which may cause the Fed to delay the previously expected September rate hike. Manufacturing data released yesterday showed that output dropped by 0.5% in August, representing the biggest decline since Jan ’14. Industrial production also fell by 0.4%. Manufacturing was hit, both by a drop in investment by oil firms and the stronger USD, which has made US goods/services less attractive to the international markets.

The USD rallied yesterday, helped by a stock market rally on Wall St and solid Retail Sales data, which provides a counterpoint to poor Manufacturing data. Interest rate futures suggest a 30% chance the Fed will raise rates tomorrow. Today, we’ll see US CPI data, which is forecast at 0.2% month-on-month, which would take the annual number to 1.9%. A positive inflation number will add to the Retail Sales data in support of a rate rise.

Eurozone posted good trade data, providing early signs of a recovery, but there is still a strong risk that the emerging markets could throw this off track again. Eurostat data showed exports grew to post a surplus of EUR31.4bn, trade between Eurozone countries grew by 4% and the number of people employed was up by 0.3%. However, this data is historical and was gathered before the Chinese markets began to post the extreme swings we’ve seen over the past few weeks. To take a more recent view, German ZEW, a business confidence survey, dropped dramatically to 12.1 (from 25) suggesting a more pessimistic outlook.

The AUD edged lower overnight after the RBA minutes delivered a dovish outlook, suggesting growth was below average and international developments (read ‘China’) have increased the risk of a deeper slowdown. Slower growth prospects leads to considerations of further policy easing, which could have an exaggerated affect on the AUD should the Fed raise their rates tomorrow.

Have a great day!