

Market Brief: FED hikes but USD falls
30 May 2020
As widely expected, the Fed opted to raise the Federal funds target rate range by 25bps to 1.50-1.75%. The tone of the statement is more positive in its tone looking forward.
Today's data releases |
Key levels | |||
---|---|---|---|---|
12.00 | MPC official Bank rate votes | Support | Resistance | |
12.00 | Monetary Policy Summary | GBP/USD | 1.3853 | 1.4145 |
12.00 | Official Bank rate | GBP/EUR | 1.1220 | 1.1575 |
Market overview
The U.K.’s yearlong squeeze on living standards may be finally nearing an end after figures out yesterday showed that headline earnings growth had picked up to 2.8% (3m YoY) (consensus 2.6%, Investec 2.7%) from an upwardly revised 2.7% in December, the strongest reading recorded since September 2015. Meanwhile, the unemployment rate saw an immediate return to 4.3% (consensus 4.4%, Investec 4.4%) after having surprisingly risen to 4.4% in December, with the number of people in work rising 168k. Alongside this we had PSNBx figures which showed that the public sector borrowed (PSNBX) £1.3bn in February (consensus +£1.8bn, Investec -£1.1bn) after having been in surplus by £10.1bn in January. Markets largely took their steer from the strong labour market figures, judging that it would supersede yesterday’s softer CPI figures at the MPC meeting on Thursday and reinforce the likelihood of a May rate hike; sterling gained 50 ticks against the dollar to $1.4070 and has since gained further by close to an additional cent to $1.4160.
The USD was down against most of its G10 peers on the day after reports that China was planning countermeasures against U.S. tariffs. China is preparing to hit back with tit-for-tat tariffs aimed at U.S. President Trump’s support base, including levies targeting U.S. agricultural exports from farm belt states according to reports in the Wall Street Journal. China likely to target key U.S. exports of soybeans, sorghum and live hogs!
Attention then turned to the FOMC meeting with the Fed - and Congress – reportedly working through a snowstorm that closed numerous government offices in Washington. As widely expected, the Fed opted to raise the Federal funds target rate range by 25bps to 1.50-1.75%. The tone of the statement is more positive in its tone looking forward. The key phrase here is that the ‘economic outlook has strengthened in recent months’ which looks to be a nod to the positive uplift to growth this year and next from recent fiscal announcements. Note that the decision to raise rates was unanimous. On top of the more upbeat tone on the outlook, a more hawkish steer on the path of Fed path tightening comes from two elements of the accompanying forecasts.
The ‘dot plot’ maintains the 3 hike view of the appropriate path for rates this year, but only just; if one further participant had considered 4 hikes appropriate then the median view would have shifted. The ‘dot plot’ also includes an extra dot (25bp hike) for next year on top of what was in the December projections, such that it now has 3 hikes for 2019. The dot plot also points to 37.5 bps of tightening in 2020. The higher ‘dot plot’ path over the 3-year horizon and more upbeat tone on the economic outlook in the statement are supported by a clear upgrade to growth forecasts for the next two years. These are also supported by the unemployment rate projections, now seen falling to 3.6% (was 4.0% in December’s forecast) by end-2020, whilst PCE inflation is seen above the 2.0% goal at 2.1% (was 2.0%) also in Q4 2020. Note that the estimate of the ‘longer-term’ Fed funds rate has also been pushed up, implying the Fed’s normalisation course might also now have further to run. Although the overall message from the Fed was a positive one, the USD suffered its biggest fall in two months and was lower versus all of its G-10 peers as it appears the market was expecting a slightly more hawkish tilt. GBP/USD advanced into the 1.41’s while EUR/USD was higher moving back above 1.2350 following the news.
The USD was down against most of its G10 peers on the day after reports that China was planning countermeasures against U.S. tariffs. China is preparing to hit back with tit-for-tat tariffs aimed at U.S. President Trump’s support base, including levies targeting U.S. agricultural exports from farm belt states according to reports in the Wall Street Journal. China likely to target key U.S. exports of soybeans, sorghum and live hogs!
Attention then turned to the FOMC meeting with the Fed - and Congress – reportedly working through a snowstorm that closed numerous government offices in Washington. As widely expected, the Fed opted to raise the Federal funds target rate range by 25bps to 1.50-1.75%. The tone of the statement is more positive in its tone looking forward. The key phrase here is that the ‘economic outlook has strengthened in recent months’ which looks to be a nod to the positive uplift to growth this year and next from recent fiscal announcements. Note that the decision to raise rates was unanimous. On top of the more upbeat tone on the outlook, a more hawkish steer on the path of Fed path tightening comes from two elements of the accompanying forecasts.
The ‘dot plot’ maintains the 3 hike view of the appropriate path for rates this year, but only just; if one further participant had considered 4 hikes appropriate then the median view would have shifted. The ‘dot plot’ also includes an extra dot (25bp hike) for next year on top of what was in the December projections, such that it now has 3 hikes for 2019. The dot plot also points to 37.5 bps of tightening in 2020. The higher ‘dot plot’ path over the 3-year horizon and more upbeat tone on the economic outlook in the statement are supported by a clear upgrade to growth forecasts for the next two years. These are also supported by the unemployment rate projections, now seen falling to 3.6% (was 4.0% in December’s forecast) by end-2020, whilst PCE inflation is seen above the 2.0% goal at 2.1% (was 2.0%) also in Q4 2020. Note that the estimate of the ‘longer-term’ Fed funds rate has also been pushed up, implying the Fed’s normalisation course might also now have further to run. Although the overall message from the Fed was a positive one, the USD suffered its biggest fall in two months and was lower versus all of its G-10 peers as it appears the market was expecting a slightly more hawkish tilt. GBP/USD advanced into the 1.41’s while EUR/USD was higher moving back above 1.2350 following the news.