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Yellen dampens the Dollar

  • UK Average Earnings Index 3m/y: 2.7%
  • UK Claimant Count Change: -6.5k
  • UK MPC Official Bank Rate Votes: 0-0-9
  • UK Unemployment Rate: 5.5%
  • FOMC Economic Projections
  • FOMC Statement
  • US Federal Funds Rate: <0.25%

Yesterday was a busy day for the market on both sides of the pond with the FOMC meeting taking centre stage. During the European trading sessions we saw Sterling rally to its highest in almost a month against the US Dollar whilst extending for its longest winning streak versus the Euro since March. The catalyst for Sterling strength was in the BoE Minutesand average earning numbers. The average earning had the biggest effect on the currency, as wage growth accelerated more than economists forecast and unemployment stayed at its lowest rate since 2008. This raised the hope of an early interest hike as it demonstrates that the economy is continuing to perform.

Meanwhile the BoE voted unanimously to keep the benchmark interest rate at a record-low 0.5 percent. The Monetary Policy Committee said the factors weighing on inflation were “likely to dissipate fairly shortly,” and price growth could strengthen “notably” by year-end. They went on to mention that there are a range of views on the likely future path of the rate. It retained a comment that the pace of tightening would be gradual. For two members the decision in June was still “finely balanced,” unchanged from recent months.

The main event for market participants was the tone and content of the FOMC press conference. With “lift off” in June being ruled out earlier this year, markets are now looking at a rate hike around September this year at the earliest. However as rates were kept near zero, the Federal Reserve signaled last night that it was moving towards a rate rise later this year, as a slowdown in economic activity from Q1 is now showing growth entering Q2 and getting strong enough to warrant a rate rise. Although growth in the US seems to be heading in the right direction, the committee did state that improvement in employment and the inflation figure needs to be seen. Caution was also expressed as Chairwoman Janet Yellen explained that the pace in which interest rates increase, as and when they do, will be gradual as to not stifle economic growth.  This sent the greenback lower as markets were anticipating for steeper rises once the Fed began to tighten.  

  • UK Retail Sales m/m
  • EUR Targeted LTRO
  • Eurogroup meetings
  • US CPI m/m
  • US Core CPI m/m
  • US Unemployment Claims
  • US Philly Fed Manufacturing Index

Looking to the day ahead, the market is likely to take its time to digest last night’s commentary whilst continuing to deliberate the outcomes for Greece, especially with the Eurogroup meetings taking place. Meanwhile the docket is once again busy with interest on both sides of the Atlantic. Following on from yesterday’s positive average earns from the UK, attention will turn to retail sales. In the US, inflation data will attract the most attention whilst the weekly job claims and Philly Fed manufacturing will keep the market interested.