Federal Reserve divided over next interest rate increase

Enrique Díaz-Álvarez09/Apr/2015Currency Updates


Sterling rose against both its major peers on Wednesday morning, before falling versus the Dollar after the FOMC minutes, to end unchanged for the day.

Wednesday was a very quiet day in the UK economy as far as data was concerned. There was, however, some encouraging production data after the Society of Motor Manufacturers and Traders announced the British car market experienced its largest monthly sales in sixteen years. The total of 492,774 new registrations extended the industry’s record breaking run into a fourth year, having climbed 6% on a yearly basis. The Bank of England warned the UK economy’s large current account deficit may cause financial markets to turn against the British economy in times of stress. The Bank’s Financial Policy Committee (FPC) noted the deficit was currently too large and would monitor the maturity and liquidity of the financing of the deficit.

At midday today the Bank of England will be announcing its interest rate decision following the end of its two day monetary policy meeting for April.


The Euro ended lower against Greenback yesterday, down by 0.6%

Retail sales in the Eurozone slipped marginally last month for the first time in five months, exactly in line with forecasts, having fallen by 0.2% month on month. On an annualised basis, sales rose by 3%, although this was down slightly on February where sales rose by 3.2%. Earlier, it was announced that factory orders in Germany unexpectedly fell for a second month in February. The figure came in well below forecasts of a 1.5% increase, declining by 0.9% on a month previous and by 1.3% on an annualised basis. However, an upward trend in business sentiment suggests that these data sets should tick up in the coming months.

Market focus in the Eurozone will be on German trade balance data out before markets open in the UK at 7am GMT.


The Dollar rose by 0.2% against its major counterparts after the FOMC meeting minutes last night, despite the central bank being divided over the next rate increase.

Last night saw the release of the minutes from last month’s Federal Reserve monetary policy meeting. We think there are a few key takeaways from the minutes of March meeting. As of the March meeting (which admittedly took place before last week’s poor jobs report), an interest rate hike at the June meeting was very much a possibility, with several participants anticipating a normalisation in the economic outlook by June. The consensus among the FOMC participants seems to suggest that recent disappointing economic indicator data could at least in part be attributed to poor winter weather. The possible impact of the stronger Dollar on the economy was mentioned, however, the committee seemed generally sanguine about such an impact. Based on our expectation for a pick-up in the US economy after the unseasonably cold winter, we continue to maintain our call for a June interest rate hike.

Yesterday we also had a speech from Federal Reserve member William Dudley, who warned an interest rate hike in the US could come a little later than expected. While Dudley still left the door open to a rate hike in June, recent weak data could cause the Fed to err on the side of hiking rates later than anticipated. Elsewhere, mortgage applications remained mostly unchanged last week, climbing by just 0.4% from a week previous.

A number of second-tier releases this afternoon in the US including jobless claims and wholesale inventories.

Rest of the world

The Bank of Japan voted 8-1 to keep its quantitative easing programme unchanged at 80 trillion Yen on Wednesday despite Governor Haruhiko Kuroda’s toughest critic on the policy board calling for a steep reduction in monetary stimulus.


Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.