Sterling rally continues as investors await tonight’s FOMC meeting
27/Apr/2016 • Currency Updates•
Sterling continued its recent impressive performance on Tuesday, rallying strongly against both the Euro and a broadly weaker US Dollar, which remains under pressure ahead of this evening’s Federal Reserve interest rate announcement.
The sharp reversal in sentiment towards Sterling so far this month is causing uncertainty for Pound buyers and sellers and we’re seeing many UK businesses using short-term hedging to help dampen their concerns.
Tonight, we expect no change in policy from the Fed, with US interest rates to be left unchanged. Financial markets continue to place almost no chance of a rate hike today, with the Fed also unlikely to give a firm indication either way on the timing of its next move.
The US Dollar will therefore be mostly driven by perceived dovishness or hawkishness in the accompanying monetary policy statement. We expect little change in tone from the March meeting, with policymakers unlikely to want to rock the boat.
Expectations that the Fed could hike three or four times this year have all but completely evaporated since the turn of the year, due mainly to financial turmoil and an economic slowdown in the global economy in the past few months.
The Federal Open Market Committee’s interest rate announcement at 19:00 UK time will be followed by the Fed’s statement half an hour later.
Ahead of the meeting, the US Dollar declined for the second straight session on Tuesday on expectations that the Fed could take a dovish stance tonight. A fairly weak set of durable goods order figures also increased concerns that a global slowdown could be filtering its way through to US domestic demand.
Meanwhile, an increase in oil prices to back above $45 a barrel also proved good news for commodity-driven currencies yesterday. The heavily commodity-dependent Russian Ruble, Norwegian Krone and Colombian Peso all ended, along with Sterling, as among the best performing currencies in the world yesterday.
Major currencies in detail:
Growing expectation that Britain will vote to remain a member of the EU in June sent the Pound 0.75% higher against the US Dollar on Monday. This extends the currency’s run of gains to 3.5% since early April.
The latest Brexit poll released by ORB on Tuesday pointed to a lead for the ‘in’ campaign. Concerns that the referendum could cause violent movements in Sterling also appear to be abating after implied volatility fell by the most in a year on Monday.
Earlier in the day, mortgage approvals in the UK pointed to a slightly weaker outlook for the housing sector. Approvals dipped by around 550 in March to 45,096.
Attention in the UK economy today will be on the latest growth figures for the first quarter, which are expected to show a modest slowdown on a year previous.
Poor US economic data provided a boost to the Euro yesterday, which ended the London session 0.4% higher against the US Dollar.
With economic releases light in the Eurozone so far this week, the single currency remains mostly driven by events elsewhere.
However, there was some rare positive economic news out of France on Tuesday. The jobless total in the Eurozone’s second-largest economy plunged by 60,000 in March, its sharpest recorded drop since the economic boom of 2000. This provides a significant boost for President Francois Hollande, as he struggles to convince voters that the French economy is recovering.
No major economic data in the Eurozone again today means that all attention will turn to the Fed’s monetary policy announcement this evening.
The US Dollar fell again versus its major peers, with the Dollar index declining by 0.3% amid a series of weak economic data.
Durable goods orders once again missed expectations in March, raising concerns about the strength of domestic demand in the world’s largest economy. Orders for durable goods rose by just 0.8% last month, with a downturn in demand for cars and electrical goods suggesting that the underperformance in the US factory sector could be far from over.
Excluding the volatile transport component, orders fell for the second straight month, declining by 0.2%.
Meanwhile, US consumer confidence also fell this month following dampening expectations for the short-term outlook. The Conference Board’s confidence index ticked down to a two-month low of 94.2 from a revised 96.1 in March.
The Fed’s interest rate decision and monetary policy statement will dominate US Dollar trading today.
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