Federal Reserve voices inflation concern, Euro rises on Catalan relief

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12 October 2017

Matthew Ryan

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

The Dollar fell against most major currencies yesterday evening after the Federal Reserve’s meeting minutes voiced concern that the slowdown in US inflation may not be transitory.

he overall tone of yesterday’s minutes was broadly in line with the message from the September meeting, with most policymakers expecting another rate hike in 2017. However, the dovish comment that claimed ‘many’ Fed officials were worried about inflation was enough to cast doubt among traders and send the currency back above the 1.19 mark against the Euro.

Earlier in the day, Federal Reserve member Charles Evans also adopted a slightly more cautious stance on interest rates. Evans advocated a wait-and-see approach for future interest rate hikes, claiming he saw no harm in waiting longer to raise rates in order to take more stock of the inflation situation. He claimed there would need to be “substantial progress in inflation”, with a premature increase in interest rates potentially not very constructive.

Evans’ somewhat dovish comments were accompanied by a disappointing set of job openings data which slowed more than expected in August, falling to 6.08 million from 6.14 million. Ahead of Friday’s much more significant US inflation and retail sales releases, initial jobless claims data and speeches from Fed members Powell and Brainard have the potential to shift the greenback today.

Sterling trades sideways despite Brexit uncertainty

The Pound proved resilient to the ongoing uncertainty surrounding Brexit, edging slightly higher against the Dollar after the Fed minutes, although slipping to its lowest level for the week versus the Euro.

Investors would have been somewhat concerned by comments from finance minister Philip Hammond that claimed that the government was planning for all eventualities of the Brexit negotiations, including leaving with no agreement in place with the EU. Theresa May’s interview with LBC in which she seemingly implied she would not support Brexit should a vote take place today also did little to support the UK currency yesterday.

Bank of England chief economist Andy Haldane will be speaking at 14:00 UK time. Haldane has been one of the more vocal members on the MPC in favour of higher rates in recent months. Any additional clues that would suggest he may soon vote in favour of a hike would further ramp up expectations of a first rate increase in a decade at the BoE’s November meeting.

Catalan referendum relief buoys Euro ahead of Draghi speech

The common currency edged higher for the fourth straight London trading session on Wednesday, rising to its strongest position in over two weeks against the US Dollar. The Euro has been buoyed by comments from Catalonia’s president who struck a more conciliatory tone during his recent speech. President Carles Puigdemont called for a ‘period of dialogue’ that would suspend the result of the referendum for a number of weeks.

Investors in the Eurozone will now shift their attention away from US policy and onto that of the ECB, with a number of central bank speakers today likely to shift the common currency. President of the European Central Bank Mario Draghi will be speaking at 15:30 UK time at an economics conference in Washington. Members Praet, Coeure and Lautenschläger will also be speaking at the same event throughout the afternoon.