Federal Reserve member Bullard ignites US interest rate hike talk, Dollar rallies
24/Mar/2016 • Currency Updates•
The US Dollar strengthened across the board on Wednesday, rising to a one-week high against a basket of its major peers after some hawkish comments from a Federal Reserve policymaker.
Federal Reserve Bank of St Louis President James Bullard claimed that the FOMC should consider hiking interest rates again at the central bank’s meeting next month. Bullard pointed to a broadly unchanged economic outlook and the prospect that both inflation and unemployment in the US could overshoot their targets.
Interestingly, Bullard even suggested that there was a ‘credible case’ for interest rates to go up at the Fed’s previous meeting last week, something that the markets were completely discounting.
Robust growth of around 2%, core inflation above the Fed’s medium-term target and a continued improvement in labour market conditions suggest that the FOMC remains on course to hike interest rates multiple times in 2016.
You can listen to me talk on recent Dollar volatility and its drivers on Share Radio.
In the UK, concerns surrounding the impending EU referendum continue to loom large. Implied volatility for three-month option contracts climbed to nearly 15% against the US Dollar, just shy of its lowest level since May 2010. We’ve observed that businesses in the UK continue to look for hedging solutions in order to eliminate the risk posed by a possible exit from the European Union.
Major currencies in detail:
Sterling fell 0.4% against the US Dollar yesterday. The exodus from riskier currencies following the Brussels attacks continues to damage sentiment for the Pound.
With no economic announcements in the UK yesterday, focus remained on the EU referendum campaigns. Bookmakers have continued to ramp up the chances of a Brexit following the events in Brussels on Tuesday.
Businesses with Sterling exposure will now turn their attention to this morning’s retail sales figures, which provide a good indication of the level of UK consumer spending. Sales have picked up strongly over the past year, having remained in negative territory throughout much of the post-financial crisis era.
The CBI’s trade survey at 11:00 UK time could also cause some volatility in the Pound this morning.
Yesterday was a rare day as the Euro-area was almost completely void of economic announcements. Another risk-averse day following the attacks in Brussels on Tuesday sent the Euro a modest 0.2% lower.
Bundesbank Head and European Central Bank policymaker Jens Weidmann spoke yesterday. Weidmann, one of the more hawkish members of the Governing Council, opposed the recent expansion of ECB stimulus measures, claiming the central bank went ‘too far’. He also argued that there remains no risk of sustained deflation in the Euro-area.
Today should be a slightly busier day in the Eurozone economy. Consumer confidence in Germany this morning will be followed by the ECB’s economic bulletin, both of which could cause moderate volatility in the single currency this morning.
The US Dollar remained well supported yesterday, ending 0.4% higher against its peers amid the continued flight to safe-haven currencies and some hawkish comments from a Fed rate setter.
Speaking on Bloomberg TV yesterday, Bullard suggested there was a good chance rates could go up at the Fed’s meeting next month, although this remains data-dependent. Bullard suggested that wages in the US should begin to rise in the coming months, while unemployment is likely to fall by almost half a per cent by the end of the year. Both of these factors would help the FOMC in its bid to normalise monetary policy this year.
In terms of economic data, new home sales ticked upwards in February, albeit slightly less than forecast. Sales increased by 2% to 512,000 for the month to February. Mortgage approvals fell modestly, by 3.3%, albeit neither had any significant effect on the Dollar yesterday.
Another speech from Bullard this afternoon could cause investors to further reprice their expectations for the next US interest rate hike. Durable goods and the services PMI data later today will likely draw more attention from currency traders.
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