Market Brief: Fed set on further hikes

As football fans the world over excitedly await the start of the “greatest show on earth”, investors were in expectant mood overnight as the US Federal Reserve delivered on their second interest rate hike of the year.

Today's data releases Key levels
09:30 UK retail sales      
12:45 EU ECB rate decision   Support
Resistance
13:30 EU ECB press conference GBP/USD 1.3205
1.3604
13:30 US retail sales + initial claims GBP/EUR 1.1329 1.1520
Today's data releases Key levels
09:30 UK retail sales      
12:45 EU ECB rate decision   Support
Resistance
13:30 EU ECB press conference GBP/USD 1.3205
1.3604
13:30 US retail sales + initial claims GBP/EUR 1.1329 1.1520

Market overview

As football fans the world over excitedly await the start of the “greatest show on earth”, investors were in expectant mood overnight as the US Federal Reserve delivered on their second interest rate hike of the year. The Federal Open Market Committee opted to raise the Federal funds target rate range by 25bps, taking it to 1.75-2.00%. This was in line with market expectations and our own forecast and was backed unanimously by the FOMC. They also now expect four rate increases in 2018, up from three previously, with updated forecasts showing unemployment rate falling to a greater extent and inflation overshoots their target faster than previously projected. The FOMC indicated that, despite stepping up the pace of interest-rate hikes, the committee “expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labour market conditions, and inflation near the committee's symmetric 2% objective over the medium term.” The post-meeting statement appeared upbeat, and dropped previous assurances that it will keep rates below levels “expected to prevail in the longer run”. Economic activity was described as rising at a solid rate (the wording was 'moderate' previously), alongside other upgrades to the economic language in the policy statement, whilst on inflation there was a further reference to the symmetric nature of the Fed’s inflation goal inserted. There was little to suggest recent trade developments were going to encourage the Fed to put its tightening plans on hold.
 
Turning to the post-meeting press conference, Chairman Powell announced that from January next year he will hold a press conference following the conclusion of every meeting as opposed to just at the end of each quarter. This may turn out to be quite relevant given that since starting press conferences back in 2011, the FOMC has made major policy changes only at meetings that were followed by a press conference. This could result in market participants being less able to clearly identify (and hence, price) when rate hike will be announced going forward. Markets reacted to the robust tone of the policy statement, at least initially. The dollar started by strengthening to 1.1740 and 1.3320 versus the euro and pound, but then sold off again over the course of the US session. 

The day ahead

The dollar has opened up weaker in both pairs as we head to today’s main event – Russia vs Saudi Arabia – and of course the ECB rate decision at 12.45pm. Following Peter Praet’s (ECB chief economist) speech last week, the market is now primed to receive some guidance regarding a final wind down in QE purchases later this year. ECB Draghi’s 1.30pm press conference will certainly provide interesting viewing. Either side of the action, the UK kicks off what will be a busy day with its retail sales release at 9.30am while in the afternoon, the US also release their retail sales data alongside their initial jobless claims.

Thought of the day

Football fans, hold on to your seats - World Cup starts today – we hope you are ready for the 64 game marathon! Here are a few interesting facts – this will be the 21st edition of the World Cup. Germany has appeared in more finals than any nation (8), they have been runners-up 4 times (also a record) and have played more games than at the World Cup than any other nation. This German inflation data released this morning was bang in line with expectations, we’ll have to wait to see if the 2018 German team lives up to expectations too, as they look to defend their title! In terms of ultimate greatness however it’s Brazil who have won the most Cups (5), followed by Germany and Italy (4 apiece) with Argentina and Uruguay following with 2 victories each. At the other end of the spectrum, Mexico is the most beaten team in the World Cup, they’ve amassed 25 losses over previous World Cups! The Investec Dealing team would like to wish Gareth Southgate and his young English team everything of the best, if we can’t with the Brexit war, let us please win some battles on the football pitch this World Cup!

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