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Fed raises rates and signals more to come.

By Jake Trask

Sterling whipped around yesterday evening as the US Federal Reserve raised rates for the third time this year. Cable popped above 1.32 reaching 1.3220 briefly before retracing. It has been sold off in the Asian session as modest dollar strength and risk aversion on Italian budget concerns affect the markets. In New York UK Prime Minister, Theresa May spoke at the UNs annual General Assembly to reiterate the UKs desire to establish a trade deal with the US and other countries once it leaves the EU. The PM was keen to put across the message that the UK wasn’t turning its back on the world and tried to spin the situation as being an opportunity for the UK and other countries it has close ties with. The warm words have done little to bolster the pound and each day that passes time runs out to get a deal done with the bloc before the November deadline. There is little date for the rest of the week from the UK. GBP/USD is lower at 1.3120.

Yesterday evening saw the US Federal Reserve raises interest rates as expected, taking its benchmark to no greater than 2.25%. The move was fully priced into the markets so it was the statement, economic projections and press conference from Chairman Jerome Powell that drove moves in the greenback. The statement removed mention of the word “accommodative” when describing its monetary policy which indicates we are exiting emergency measures and approaching a time when rate hikes will no longer be necessary. The omission of this word saw the initial drop in the greenback with cable briefly jumping through 1.32 and EUR/USD coming close to hitting 1.18. After this knee jerk reaction the uptick in growth forecasts for this year and next and the expectation for future rate hikes from the FOMC (the “dot plot”) showing we are set for a December move and three more in 2019 saw the dollar gain. The fx moves during the remainder of the US session showed the reaction as being relatively neutral with little stated that wasn’t expected. EUR/USD after hovering around the 1.1750 mark has dropped on Italian budget concerns to 1.17.

With the Fed rate hike decision done and dusted market attention can now turn to other matters and it appears Italy is now in the cross hairs of investors. The Italian government coalition was due to discuss its proposed budget today however it has apparently been delayed due to infighting between finance minister Giovanni Tria and Deputy Prime Minister and Five-Star leader, Luigi Di Maio over the spending plans. Tria is looking to run a deficit of less than 2% however separatist Di Maio is wanting something nearer the 2.5% mark so he can push through his plans of universal income and other controversial spending proposals. The euro sell-off appears to have been halted for now however should no deal be agreed then we can expect another leg lower for the shared currency. GBP/EUR has moved back above 1.12 on the news.

Like other currencies the Aussie yo-yo’d at around 7pm yesterday reacting to events from Washington. AUD/USD briefly went through .73 before falling away. As mentioned earlier in the week it’s a quiet finish to September for the Aussie with little data before next Tuesday’s interest rate decision from the Reserve Bank of Australia. GBP/AUD sits at 1.8145.

USD/CAD briefly went back under 1.30 yesterday as the Fed held raised rates at no greater than 2.25%. CAD has sold off again since currently pushing back towards the 1.3050 level with little help from Brent Crude despite it holding above $82 a barrel. Tomorrow sees GDP figures from Ottawa with 0.1% growth m/m penciled in. GBP/CAD trades at 1.7120.

Yesterday’s other big rate decision was from New Zealand where the Reserve Bank held rates as expected at 1.75%. There was no change in the outlook from RBNZ Governor, Adrian Orr who advised that rates will likely remain at the current record low throughout all of next year. NZD/USD sits at .6640 with GBP/NZD trading at 1.9745.