Fed Caution Hits dollar

Meeting minutes give mixed signal

The minutes of the last meeting of the FOMC which was held on 2/3 May show that the members were concerned about the prospect for stable growth given the blip that had been seen in the employment market the previous month. They agreed that a further rate hike should be delayed until it was clear that the slowdown was temporary and a factor of market forces.

Their remarks were tempered somewhat by a slightly perverse agreement that a rate hike would still be necessary sooner rather than later.

During the financial crisis, the Federal Reserve, Bank of England and, eventually, the European Central Bank took extraordinary measures to promote growth and drive their economies forward.

There has been concern that those measures haven’t been removed yet despite growth returning, although there is some talk that the European Central Bank will wind down a portion of its Asset Purchase Scheme at its next meeting. The minutes also reveal that the FOMC is planning a reduction in the size of its balance sheet as rate hikes bite.

The dollar had a more “legitimate” reason to appear on the back foot following what was clearly a cautious FOMC meeting. The dollar index lost 0.3% falling to 96.97.

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Euro bounces as Fed dithers

The Euro which had corrected to as low as 1.1168 bounced following the FOMC Minutes. It is in touching distance of the 6 ½ month high seen recently rising to 1.1245.

There are no new factors to drive the Euro and this is clearly a “dollar move”.

Following the release of the FOMC minutes, further caution was sounded by Chicago Fed President Charles Evans who expressed concern that the Fed is going to miss its inflation target to the downside. A more gradual path for rate hikes would be his preference but he made no mention of how he would be voting going forward.

The interest rate futures market is pricing in an 83% chance of a hike in June but only a 46% chance of two further hikes in 2017. The likelihood of a June hike has increased a little since the fall brought about by concerns over Trump’s ability to pass his agenda but the probability of a continued path of hikes has slowed considerably.

The single currency is gaining across the board reaching 0.8664 against the pound and 125.51 against the JPY although against the Swiss Franc the reaction has been mixed.

Sterling reacting to global events

Alongside the Euro, the pound has also entered a reactionary phase. The campaign for the General Election remains suspended as the nation reacts to the Manchester terror attack on Monday evening. Theresa May has acted in a strong and commanding manner raising the threat level and deploying soldiers at key locations.

Despite the lack of campaigning, opinion polls are still being released. The latest puts the Conservatives 12% ahead of Labour on 48%. There is controversy about a perceived U-turn in policy over a key social security pledge but this shouldn’t be sufficient to derail a decisive victory providing a powerful mandate for upcoming Brexit negotiations.

Sterling has recovered from its fall to 1.2950 and is trading technically given the lack of fresh economic data or political factors. It is currently just below the psychologically important 1.3000 level against the dollar, last trading at 1.2978. Against the Euro the pound continues to suffer having reached 0.8664 before settling back to 0.8650.

The next significant data release for the U.K. is manufacturing activity late next week. Today we see a further revision to Q1 GDP with an unchanged 0.3% QoQ leading to an annual rate of 2.1%.