The pound struggled to gain any headway today after mixed employment data. Whilst the headline figure showed unemployment had dropped to 5.2% in the 3 months up to October (the lowest since May 2008), the slowdown in wage growth continues which will give the Bank of England more reason to keep interest rates at the record low level well into 2016. Indeed some analysts are predicting the first rate hike will now take place in early 2017.
Over in the Eurozone, inflation data was broadly in line with expectations and the euro, like other major currencies will be treading water against the USD which awaits the key calendar event in recent months. Tonight the US Fed will announce what is likely to be the first interest rate hike in almost a decade – an increase of 0.25% has been almost entirely priced in so the market will be focusing on the accompanying monetary policy statement and press conference.
The statement should shed more light on the Fed’s thinking going forward – again the market’s expecting tonight’s announcement to be classed as a “dovish hike” – i.e. a 0.25% hike but further tightening will be very much dependant on jobs and inflation data, leaving open the possibility of very slow increase in rates or even monetary easing again should data disappoint. If that is the case, expect the USD to lose ground, benefiting particularly higher yielding currencies like the Aussie and Kiwi, also EURUSD should rally strongly and BPUSD should see some gains.
Other scenarios, albeit more unlikely would be no interest rate hike, which would cause a rout on the dollar (expect 2-3% losses across the board), or most unlikely, more aggressive tightening, an interest rate increase by 0.5% which would see significant dollar strength. Fed announcement at 7pm UK time with press conference at 7.30pm.