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Focus remains on central banks following Fed rate hike.

By Joshua Hughes

The only notable release from the UK yesterday came in the form of annual CPI figures, which held firm at 2.4%. This reaffirmed the markets view that inflation remains an issue for the UK economy moving forward, putting further pressure on the BOE to intervene.

Attention quickly turned to the Fed rate decision last night which saw the US central bank raise rates to 2% causing the pound to retreat initially before rebounding. The latest run of retail sales figures were released this morning at 9:30 and came in well over forecast at 1.3% which caused the currency to strengthen across the board. We could see the pound strengthen further throughout today’s trading following this morning’s releases but movement will be heavily motivated by central bank announcements from the ECB and BoJ.

Focus yesterday was centered firmly on the US as the Fed raised interest rates to 2% which saw the USD rally across the board. The US economy has remained healthy which has led to the central bank shifting to a more hawkish outlook and moving away from their crisis-era guidance. Markets will now expect a further 2 rate hikes in 2018 and 3 more in 2019 with the probability of a September hike now sitting just above 80%. The Fed also revealed they are not overly concerned with inflationary pressures to the US economy as they state they are content with having inflation remain over the 2% target until 2020.

In other news we will see “Trade War” discussions move back into focus as the week draws to a close. Trump is due to release his final plans for tariffs on Friday with the main resistance likely to come from China. This could lead to uncertainty being brought back into markets and investors may look to take a risk averse approach to investment which could see safe haven currencies rally towards the weeks close.

Markets will remain focused on central banks over the coming days as movement will be motivated by the ECB announcement today and the BoJ policy decision on Friday. Both central banks are likely to hold a steady course but the rhetoric within each statement will be key, especially regarding the ECB’s quantitative easing programme.

The Euro retreated off the back of last nights Fed rate hike as attention now turns to today’s ECB statement. Focus will be centered on the central banks plans to withdraw from their Quantitative Easing programme. We have recently heard comments from the ECB stating that we could see a drawdown of this programme as soon as September but with the recent uncertainty caused by the Italian elections alongside a number of uninspiring data releases we may hear the central bank’s tone shift to a more cautious approach. Markets expect the central bank to extend the QE programme until the end of this year and reaffirm the possibility of a rate hike mid-way through 2019. With little data of note to discuss today movement will be motivated by central bank comments as we could see the single currency remain under pressure.

The Australian dollar retreated following last nights Fed rate hike as the currency dropped almost a cent against the USD following the announcement. The AUD rebounded briefly but these efforts were met with resistance following last night’s employment figures which painted a mixed picture of the Australian jobs market. Although the unemployment rate fell further than forecast the overall employment change unexpectedly dropped over the past month. The RBA are still optimistic that hiring will pick up and see unemployment falling to 5% which in turn should see wage growth rise, an issue that has remained key to the RBA’s cautious stance.

Tonight we will hear from the RBA assistant governor, Ellis, who is expected to remain dovish and reaffirm the RBA’s current position but any surprises here will likely move markets. With little data of note due for the remainder of this week the AUD will be motivated by continued USD strength, the ECB announcement today and the BOJ policy announcement tomorrow.

The Canadian Dollar fell sharply against the USD following the Fed’s hawkish guidance last night but as oil prices rallied the loonie was able to recuperate the majority of these losses and hold steady. With little data of note due from Canada over the next 2 days we will likely see movement motivated by market reaction to the Fed, oil prices and today’s ECB announcement.

Little data of note to discuss from New Zealand yesterday as investors focused on the Fed for guidance. Although rising oil prices aided commodity currencies the USD was able to briefly advance past the .70 mark against the NZD following the Fed rate hike. With little data due for the remainder of this week sentiment will drive the NZD and we may see a further sell off of the currency as the USD continues to rally.