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December 2016

US Federal Reserve raised rates and forecasts more of the same

Published: Thursday 15 December 2016

  • US Federal Reserve raised rates and forecasts more of the same
  • No change expected from BoE but the tone of statement is key for GBP

The US Federal Reserve Open Market Committee unsurprisingly increased their interest rate by 25 base points to 0.5% when they met yesterday. That is the first movement in a year and only the second rate rise in a decade. That was widely forecast though, as mentioned in yesterday’s Daily Currency Insight. So it wasn’t, on its own, enough to strengthen the USD. What did move the markets was the more hawkish commentary from the policymakers which surprisingly plotted 3 rate hikes in 2017 vs the 2 rate hikes that the market was expecting.
 
Fed Chair Janet Yellen also expressed confidence in the economy and called the extra quarter point hike a ‘very modest adjustment’ spurring the USD to strengthen across the board. The FED funds futures are now pricing in a 70% chance of another rate hike in June and a 100% chance of another round of tightening in the second half of the year.  It is clear that Yellen is unfazed by the rising yields and the negative impact of a stronger USD. This hawkish view is likely to keep USD well supported throughout 2017 and any pullbacks will probably be shallow.  This afternoon’s US retail sales might disappoint though, so there is room for a bit of short term profit taking.
 
The focus will now shift to the Bank of England monetary policy announcement at 12:00 BST. There are no changes expected; however the macro data has continued to surprise the market. Inflation in November posted a two year high, we are seeing stronger retail sales - reflecting better consumer confidence and we will see more of that later today, wage growth is still accelerating and Purchasing Managers’ sentiment also increasing; all factors reflecting stronger economic activity. So although the BoE Governor is likely to err on the side of caution around the risks posed by Brexit, there is room for Mark Carney to set a more hawkish tone; especially after reiterating the Central Bank’s limited tolerance for an overshot of inflation. 
 
Other than these mightily important items, there isn’t a lot of other data today. Tomorrow brings a smattering of EU and UK data and we will get New Zealand’s consumer confidence survey results overnight, so there is no rest for the wicked.
 
Speaking of which, a Bank in Australia slipped up when an unemployed man was allowed to run up a A$9,000 overdraft without being checked. The man, Luke Moore, further tested the bank by buying more and more goods and services and found no one in the bank questioned him. Eventually, after a great deal of flash living and debauchery, the bank realised its mistake and called a halt to Luke’s activity. By this time, Luke owed the bank A$1.25 million.  He was charged and jailed for obtaining financial advantage by deception and dealing in proceeds of a crime but that has been overturned because he didn’t deceive anyone. He knew what he was doing but so too did the bank. The story has a fab ending; Luke is now studying to be a criminal lawyer.


Fishing


A priest loved to fly fish. It was an obsession of his. But the weather in his corner of Ireland had been so bad this year that he hadn't had a chance to get his beloved waders on: not once.
 
But then, the weather improved on a Friday and the forecast for the coming Sunday was excellent fishing weather, so he called a fellow priest, put on a really croaky voice and said he was feeling rough and was going to be bedridden for a few days. He asked the other priest to take over his sermon on Sunday. The other priest was happy to oblige and wished him a quick recovery.
 
The fly fishing priest drove fifty miles to a river near the coast so that no one would recognise him but, as he drove, an angel up in Heaven saw what the priest was doing. He told God who agreed that some punishment was in order.
 
With the first cast of his line a huge trout gulped down the fly. That was just the start. For several hours the priest landed several beauties. Mid-afternoon he was in a battle with a massive fish and after an hour of work, he landed the record breaking Salmon.
 
Confused the angel asked God, "Why did you let him catch that huge fish? I thought you were going to teach him a lesson."
 
God replied "I did. Who is he going to tell?"
 

Today's Major Economic Releases
 

Market BST Data/Event Previous Expected
EUR 09:00 EU: Flash Manufacturing Purchasing Managers' Index 53.7 53.9
EUR 09:00 EU: Flash Service Purchasing Managers' Index 53.8 53.9
GBP 09:30 UK: Retail Sales 1.9% 0.2%
GBP 12:00 Bank of England Official Bank Rate Vote 0-0-9 0-0-9
GBP 12:00 Bank of England Monetary Policy Summary    
GBP 12:00 Bank of England Official Bank Rate 0.25% 0.25%
GBP 12:00 Bank of England Asset Purchase Facility 435b 435b
CAD 13:30 Canada: Manufacturing Sales 0.3% 0.7%
USD 13:30 US: Consumer Price Index 0.4% 0.2%
USD 13:30 US: Core Consumer Price Index 0.1% 0.2%
USD 13:30 US: Unemployment Claims 258k 258k

Daily Currency Analysis by Denzil Rickerby
 
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