02/05/2018 - Fed Expected To Hold Rates

USD

The U.S. Federal Reserve is set to hold interest rates steady this week but will likely further encourage expectations that it will lift borrowing costs in June on the back of rising inflation and low unemployment. Investors have all but priced out the chance of a rate hike at the end of the Fed’s two-day policy meeting on Wednesday, particularly given its adherence in recent years to only raising rates at meetings that are followed by press conferences.

The Fed raised its benchmark overnight lending rate at its March 20-21 meeting by a quarter percentage point to a target range of between 1.50 percent and 1.75 percent. It currently forecasts another two rate rises this year, although an increasing number of policymakers see three as possible. The Fed’s next policy meeting after this week is scheduled for June 12-13. Investors overwhelmingly see a rate hike then. The pace of rate increases has picked up since the central bank began its tightening cycle in December 2015. It raised rates once in 2016, but lifted borrowing costs three times last year amid a strengthening economy.

Ahead of this week’s meeting, Powell has stuck to flagging a middle-of-the-road approach on rate increases in the face of data showing the robust economy had not yet triggered a jump in inflation. The Fed’s preferred measure of inflation soared 1.9 percent in the 12 months through March, the biggest increase since February 2017, after increasing 1.6 percent in the year through February. Unemployment is at a 17-year low of 4.1 percent and the Trump administration’s tax cuts and fiscal stimulus are expected to further juice the economy.

GBP

British shares rose on Tuesday as data showing a slowdown in manufacturing growth to a 17-month low sent the pound lower, giving dollar-earning firms a tailwind and helping keep the FTSE afloat while most European markets were closed for Labour Day. The data was the latest in a run of mediocre economic indicators for the UK and further reduced the chances of a rate increase from the Bank of England when it meets next week.

Yesterday reports also come out of ministers criticising the upper house of parliament over its vote to hand parliament powers to block or even delay Brexit, saying the move would tie the government’s hands in negotiations with the European Union. The House of Lords voted overwhelmingly on Monday in favour of an amendment to Prime Minister Theresa May’s Brexit blueprint, or the EU withdrawal bill, to offer what some peers said was a truly “meaningful vote” on any final deal.

At a meeting of May’s top cabinet ministers, the prime minister and her Brexit secretary, David Davis, led the expressions of disappointment over the Lords’ vote. He declined to comment directly on whether the government would try to overturn the amendment which, if passed by the lower house, would allow parliament to send ministers back to the negotiating table in Brussels or halt the Brexit process. The government has said parliament will get a vote on any final deal with the EU, but only to “take it or leave it”. Some peers in the House of Lords, and members of parliament in the lower house, want parliament to be given a bigger say in the process.
 

Key Announcements

09.30 – GBP – Construction PMI; Forecast at 50.5 against previous of 47.0

13.15 – USD – ADP Non-Farm Employment Change; Forecast at 200K against previous of 241K

19.00 – USD – FOMC Statement

19.00 – USD – Federal Funds Rate; Forecast not to change from previous of <1.75%