Federal Reserve signals March rate hike in Yellen’s final meeting

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1 February 2018

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The US Dollar edged modestly higher against its major peers last night following the Federal Reserve’s first monetary policy meeting of 2018, Janet Yellen’s final meeting as Chair.

T
here were no surprises from the central bank with interest rates left unchanged at a range between 1.25-1.5%. US Dollar traders reacted positively to the Fed’s relatively upbeat assessment of the US economy which it claimed was growing at a ‘solid rate’. Policymakers talked up the improving labour market which is currently around the level deemed as full employment, while it also issued an upgrade to its inflation outlook. Janet Yellen’s final statement claimed that inflation will move up this year and ‘stabilise’ around 2%, rather than ‘remain below’ 2% in the near term.

The hawkish assessment from the Fed last night reinforces our view that the Central bank remains firmly on course to raise interest rates again at its next meeting in March, Jerome Powell’s first as the new Chairman. Financial markets are in agreement and are now pricing in a 99% chance of a hike next month, up from 90% prior to last night’s meeting. We then forecast another hike in August and, in our view, a total of four hikes during 2018 still remains very much on the cards.

Sterling spikes to near one week high, Eurozone inflation slows

Sterling spent much of Wednesday fairly range bound against the US Dollar, shrugging off an earlier report that EU officials had rejected the City of London’s Brexit plans for banks. The currency then jumped by over half a percent this morning back above the 1.42 mark. With no major catalyst cited, the sharp upward move in the currency was largely driven by technical factors. Traders will now turn their attention to this morning’s manufacturing PMI, which could present additional support for the Pound if it surprises to the upside.

Meanwhile there was some better-than-expected economic data out of Germany yesterday, further improving optimism surrounding the recovery in the Euro-area. Unemployment in Europe’s largest economy unexpectedly dropped by 25,000 in January, taking the overall jobless rate in the country to a fresh record low 5.4%. Eurozone inflation news for last month was less encouraging. The headline measure of price growth slipped back to 1.3%, reinforcing our view that the European Central Bank remains a long way off raising interest rates in the currency bloc.