Bank of England Weale hints at rate cut, markets await FOMC meeting

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26 July 2016

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The US Dollar dipped as markets opened for the week on Monday, with investors in a cautious mood ahead of Federal Reserve and Bank of Japan meetings later in the week.

T
his week’s main event in the currency markets will undoubtedly be Wednesday’s FOMC meeting. With the Fed almost certain to keep rates unchanged, investors will instead be looking for signs that the US central bank is becoming increasingly likely to hike interest rates again before the end of the year.

Following a string of impressive economic data releases in the world’s largest economy over the past few weeks, Fed funds futures are now indicating around a 56% chance that rates will be increased in December, up from the 48% at the end of last week.

We also await this Friday’s Bank of Japan meeting with great interest. Policymakers in the country are heavily expected to finally announce an increase in easing measures in order to support the stagnant Japanese economy. Growing expectations for both an interest rate cut and further monetary stimulus recently caused the Yen to suffer one of its worst weeks in 17 years.

Closer to home, Sterling slipped during Asian trading after Bank of England rate setter Martin Weale hinted that he would be voting for an immediate interest rate cut next month following last week’s dismal PMI data. We expect a number of the more dovish MPC policymakers to follow suit when the central bank next meets on 4th August.

The Euro also remained pinned below the 1.10 mark against the US Dollar for much of the day, having fallen to its weakest position since the Brexit vote at the end of last week following the terrorist attack in Munich.

Major currencies in detail:

GBP

Sterling fell 0.3% overnight against the US Dollar after the dovish comments from Martin Weale.

The CBI’s latest industrial trends survey also painted a fairly bleak picture of the UK’s manufacturing sector post-Brexit vote. The overall index fell from -2 to -4, with expectations for the next three months falling to their lowest level since December last year. This follows Friday’s fairly dismal PMI figures, which showed a contraction in the UK manufacturing and services sectors this month.

Economic data out of the UK will be relatively light in the lead up to next week’s Bank of England meeting, where we expect interest rates to be lowered for the first time since 2009. Revised GDP numbers for the second quarter on Wednesday morning are not likely to be a significant mover.

EUR

With no major announcements out of the Eurozone on Monday, the Euro was barely moved, although rose 0.3% against the US Dollar during Asian trading.

The negative effects of last month’s Brexit vote is expected to shave 0.1% off growth in Europe’s largest economy this year according to the Institute for Economic Research (IFO). IFO revised its expectations for German growth in 2016 down to 1.7% from 1.8% on Monday, citing the uncertainty caused by Brexit and the series of terrorist attacks in Germany.

Eurozone inflation and growth figures on Friday morning are the main economic releases in Europe this week. However, with no data releases or announcements today, the Euro will likely be driven by events elsewhere.

USD

The US Dollar fell 0.4% overnight as investors looked ahead to meetings of the Federal Reserve and Bank of Japan later in the week.

Monday’s Dollar Fed manufacturing index added to the recent stream of positive economic reports out of the US economy. The index remained negative although rose to -1.3 from -18.3.

With the UK’s referendum now out of the way, political focus will soon turn to the US Presidential Election in November. Many bookmakers are now placing around a 40% chance that Donald Trump will win the race to the White House.

Today will be a busy one in the US. The latest services PMI and new home sales for June are both expected to add to the string of positive economic news. Consumer confidence at 15:00 UK time will also be worth keeping an eye on.

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