FED still eyeing December rate hike

Wednesday’s trading session was relatively quiet with most exchange rates remaining within a 0.5% range throughout the day. This was largely due to an absence of any key eco stats with the markets patiently awaiting the much anticipated FOMC minutes from the US at 7pm. A couple of small releases were announced with Euro-zone construction output again contracting last month, and US Housing Starts after lunch posting a slightly lower than expected figure. The announcements were however insignificant compared the importance of the minutes and so did not affect exchange rates directly.

The current timing of the first US rate hike is one the most topical subjects in the currency markets at present. After a number of delays the markets now have the biggest expectation yet of a small base rate increase to be implemented in December. The US labour market has improved significantly in the last couple of months and underlying inflationary pressures warrant a rate hike sooner than later. This is quite different to the UK where inflation levels are likely to remain low throughout 2016, likely putting a UK rate hike off until 2017. The minutes were announced last night and Janet Yellen informed the markets that conditions ‘may well be met’ by December to allow for the first rate increase since the recession. Fed officials see the job market continuing to improve with inflation also starting to move towards the 2% target. With the dollar already in a strong position, and with this news being of no change to previous expectations, dollar exchange rates remained relatively unchanged following the announcement.

In the early hours of this morning there was also an interest rate decision from Japan where rates were held at 0.1% and so the markets were relatively unaffected by this.

The main focus for the day ahead is the latest Retail Sales figures for the UK at 9:30am, which on the face of it could cause some concern for sterling exchange rates. After last September’s excellent figures, October is forecast to have dropped sharply from 1.9% growth to a -0.5% contraction, which if confirmed could very well weaken the pound. At 12:30pm we also have the ECB monetary policy meeting for accounts where we may get further insight into Euro-zone developments and the likelihood of further monetary easing in December.