The Federal Reserve, as was widely expected, lifted interest rates by 25 basis points. The central bank also sent out some positive indicators for the US economy, such as increased growth projections, dropping unemployment forecast, keeping inflation forecast steady and keeping the dot plot with three hikes planned for next year.
However, the dollar was set on focusing on low inflation concerns and this sent the buck southwards.
Inflation concerns unnerve traders
Dollar traders were unnerved by the fact that there were 2 dissenters in the vote, both of which voted against hiking on low inflation’s fears. Furthermore, Fed Chair Janet Yellen also alluded towards low inflation being more ingrained than temporary. This came after particularly disappointing inflation data earlier in the day, which saw core CPI, which strips out more volatile items such as energy and food, climb by a meagre 0.1% in November, down from 0.2% in October.
Apparel prices were noticeably lower, falling to multi decade lows. Whilst the Fed seems content to press ahead with three rate rises next year, the market is doubtful this can be achieved while inflation remains so stubbornly low.
Whilst the Fed fund rate didn’t register any change, the sell off in treasury yields and dollar confirm the fears. The dollar tumbled following the meeting, closing the day 0.6% lower and could remain under pressure until the next catalyst in the form of retail sales later today. The Dow hit a record high, meanwhile the financials pulled the S&P of session high following the Fed revelations.
BoE in focus
All eyes will now turn to the BoE. The central bank is not expected to raise rates and there will be no press conference following the meeting so investors will need to use the meeting minutes and the vote split to gauge the central banks tone.
Given the rate rise last month and all the uncertainties that lie ahead over the next we expect the central bank to project a holding tone. The BoE are not expected to lift rates for around 12 months, so investors will instead be looking closely for clues as to where the central bank see inflation heading and how the Brexit deal is expected to influence interest rate projections going forward.
GBP/USD gained close to 0.7% in the previous session, charging through $1.34 on a mixture of pound strength and dollar weakness. Heading towards the BoE release the pair has managed to extend its gains. A non-event from the BoE is unlikely to knock, the pound as it eyes up $1.3450, it would take disappointment to pull the pound lower.
The FTSE is marginally lower ahead of the bank report, trading just shy of 7500.
ECB – growth projections key
A quick comment on the ECB, which is also due to keep rates on hold. However, Draghi will give a press conference after. In October the ECB began tapering its QE programme, the central bank is unlikely to make any changes to this. Draghi has also clearly stated that rates won’t rise until after the wind down of the programme. Market attention will firmly be on growth projections. Optimism from Draghi and continued dollar weakness could send the EUR/USD back towards $1.19.