Saturday 29 October 2016

Daily Market Update: USD weakens as Fed stops short of signalling September hike

Rachel Barden

Published 27/07/2016 | 10:54

Sheets of five dollar notes are fed through a sorting machine at the Bureau of Engraving and Printing in Washington, D.C., U.S.
Sheets of five dollar notes are fed through a sorting machine at the Bureau of Engraving and Printing in Washington, D.C., U.S.

U.S. dollar has weakened overnight after the U.S. Federal Reserve held back from signalling a near-term interest rate rise.

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Following its 2 day policy meeting, the Fed announced that it was no longer as concerned by possible shocks to the U.S. economy, saying that ‘near term risks to the economy have diminished’, and suggested that a hike as early as September was not out the question. Markets however were not convinced that the Fed is gearing up to act that soon by this more upbeat and positive tone. With no clear signal as to when the next hike may occur, market expectations are set firmly for no interest rate rise until at least after the US elections, and the chances of no increase in rates until December, or even no increase at all in 2016, have become more substantial. EURUSD is testing the 1.11 mark this morning, with GBPUSD up above 1.32.

In the UK, already this morning we have had data from the Nationwide House Price survey, which shows that British house prices rose at their fastest annual pace in four months in July. This data however is unlikely to have captured any of the impact from June’s Brexit vote. House prices rose 5.2% in July, compared to the 4.5% increase that was expected, and were slightly up on June’s 5.1% increase. Earlier this month, the Royal Institution of Chartered Surveyors said uncertainty caused by the Brexit vote had prompted a "marked drop" in housing market activity, and it may be several months before this weakness will be captured in the house price data.

The euro has gained against GBP overnight, back up over the 0.84 level this morning, despite news that European Union authorities are reportedly preparing contingency plans for the potential winding down of Banca Monte dei Paschi if the Italian lender has a poor reading in stress tests later this week and is deemed to have insufficient capital to withstand an economic downturn. Results on the stress tests carried out on a number of banks will be announced on Friday, but The Tuscan bank, the 3rd largest bank in Italy in terms of assets which has one of the heaviest bad loan burdens in Italy, is hoping for approval from the European Central Bank before Friday for a plan it has already submitted to sell off its bad debt. Euro-zone economic confidence survey for July is out at 10 am and will be watched closely for the impact of the UK vote to leave the euro-zone.

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