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September 2017

Federal Reserve maintained view to raise rates

Published: Thursday 21 September 2017

  • Federal Reserve maintained view to raise rates
  • UK retail sales stronger than expected

By Ricky Nelson

Overnight the Federal Reserve maintained their view that they would raise rates again this year and three times in 2018. The meeting was much more bullish than the market was anticipating and was the catalyst for a Dollar revival versus all major currencies. The Federal Reserve does not believe that the hurricanes will materially affect the US economy despite weaker data recently. 11 Federal officials see one more hike in 2017 which is four more than in June and Federal Reserve Chair Janet Yellen reinforced that optimism in her press conference when she noted that the recovery was still on track and that the economy will continue to grow at a moderate pace in the coming years. Exports and business investment are robust and the jobs market continues to increase at a healthy pace. Inflation is not expected to cause any issues and gradual hikes are still warranted according to policy makers. Markets are now pricing in a much higher chance of a hike in December. The hawkish message sent the Dollar soaring with EUR/USD backing off from 1.2000 and Sterling dipping back below 1.3500.
Sterling Dollar broke above 1.3600 briefly on stronger than expected retail sales, consumer spending jumped by 1% in August much higher than the 0.2% which had been expected. Spending in July was also revised higher. The bullish release far exceeded market expectations and will reinforce the Bank of England’s view that early rate hikes may be necessary. The Pound was unable to hold onto gains due to renewed dollar strength in the afternoon and the weight of Brexit negotiations, however, if the data continues to outperform expect the calls for rate hikes to grow louder and the Pound to continue to rally.
Stronger data and polling showing that the ruling party is back in the lead for the weekend elections allowing the NZD to make gains overnight. The election is still too close to call although it would seem that the market is anticipating that the status quo will be maintained. Second quarter GDP is due this evening  and although the central bank has been more cautious of late, growth is expected to have accelerated on the back of stronger retail sales. The Australian Dollar also rallied as Central Bank official, Ellis noted that there was still a lot of slack in the Australian Jobs market.
There is little tier one data due to be released today with borrowing data due from the UK this morning and jobless claims in the US this afternoon.