Friday 15 December 2017

Daily Market Update: US dollar on the front foot as a 2015 Fed rate hike ‘is still operative’

Shane O'Hanlon

Sterling initially consolidated against the US dollar yesterday having gained 2% versus the greenback over the course of the previous fortnight as investors pushed back their expectations of when the U.S. Federal Reserve will raise interest rates for the first time in almost a decade.

As was the case when

China's central bank loosened conditions, via its currency and interest rate policies, last week's announcement from the Fed to leave rates unchanged could prompt a similar dovish policy stance from other central banks. The ECB may feel increased pressure to further ease policy (additional QE) while the Bank of England MPC could delay a tightening move that may have been linked, directly or indirectly, to the FOMC. Likewise the pound was little changed versus the Euro as the markets were unmoved by BoE Chief Economist Andy Haldane's comments on Friday that the bank's next policy move could be a rate cut. Viewed by many as the most dovish member of the Monetary Policy Committee his comments had limited impact.

In part thanks to the BoE's base rate remaining at historically low levels, Rightmove’s House Price Index released yesterday showed the average price of a house in England and Wales hit a new high of nearly £295,000. The asking price for homes rose 0.9%, or £2,550, the biggest increase for September in 13 years as the supply shortage helped push the index ever closer to the £300,000 barrier which is likely to be breached by the end of the year.

Meanwhile Europe's largest economy is expected to continue to grow in the second half of 2015 despite global uncertainties due to the economic slowdown in China according to the German Bundesbank. Rising domestic consumption, growing exports and continuously high employment rates are expected to support German growth. In its monthly report the Bundesbank said it expects the German economy to expand by 1.7% this year.

In the US existing home sales fell more than expected in August. The National Association of Realtors said yesterday resales dropped 4.8% to an annual rate of 5.31m units versus expectations of 5.51m units. Later in the session Atlanta Fed President Dennis Lockhart said that 2015 could still see Fed tightening and that he is 'comfortable enough' with inflation to initiate a hike. He continued 'as things settle down, I will be ready for the first policy move on the path to a more normal interest rate environment'. 'I am confident the much-used phrase 'later this year' is still operative. Perversely these hawkish comments, which could signal the end of ultra loose monetary policy, helped the Dow to a 0.77% gain despite a selloff in health-care stocks and helped the dollar to 1.1160 against the Euro from 1.1325 this time yesterday. Closer to home the FTSE share index closed marginally higher at 6,108 whilst Chinese shares were the lone winners in Asia yesterday as the rest of the region headed lower on lingering worries about weaker global growth. The Shanghai Composite ended up 1.9% compared to Hong Kong's Hang Seng and Australia’s main index down 0.8% and 2% respectively.

Meanwhile in Asian trade this morning crude oil prices fell as traders took profit following a 4% upward swing yesterday after data showed U.S. drilling slowed and a report said $1.5 trillion worth of planned production was no longer viable at current prices. Crude has halved in value over the last 12 months as soaring production has outstripped slowing demand. However, lower prices have now begun to hit drilling which may bring about a bottoming out process and, in time, could potentially see prices move higher.

In the absence of top tier economic data releases FX markets will continue to monitor closely developments in Greece as Alexis Tsipras and his Syriza party look to form a government tasked with implementing unpopular spending cuts and tax increases. European Commission President JeanClaude Juncker called on Greece to work for stability and to stick to its reform agreements. This morning's UK public finances figures should demonstrate a further improvement at least in line with the improvements already seen. While the Eurozone Consumer Confidence report this afternoon will be closely watched. In the US the Richmond Fed Manufacturing Index goes to print but all eyes (and ears) will be on the Fed's Dennis Lockhart who again takes to the stage, this time in Alabama. In addition, the market is waiting to hear from Fed Chair Janet Yellen who is due to speak on Thursday.

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