Business

Market awaits signals from the Fed on future rates rises

Federal Reserve building in Washington DC, US. Close up of a top part of the building with eagle statue.
Federal Reserve building in Washington DC, US. Close up of a top part of the building with eagle statue. Federal Reserve building in Washington DC, US. Close up of a top part of the building with eagle statue.

A key factor for forex markets over the coming months will be the US Federal Reserve and the timing and extent of any rate hikes.

The weakness in the US economy in the first quarter resulted in a significant scaling back of rate hike expectations by financial markets.

The first full 25bps increase in US rates is not now expected until late 2015. By contrast, at the start of the year close to three full 25 bps rate increases were being priced in by markets for this year.

More recently, the US macro data (including May payrolls and retail sales figures) have suggested that the economy is rebounding after its first quarter soft patch. This will have helped to reinforce the Fed’s view that the Q1 slowdown was due to transitory factors. So tomorrow’s FOMC meeting is a key market event, notwithstanding the consensus view that rates will be left on hold.

In the UK, the focus will be on the latest raft of labour market data. The unemployment rate is anticipated to remain near a 7-year low of 5.5 per cent in April. Meantime, annual growth in earnings is forecast to pick-up further in April potentially to it’s strongest rate in six years.

CPI inflation is expected to edge up to 0.1 per cent in May, after falling to -0.1 per cent in April, its lowest level since 1960. Thus, real wages in the UK look to have picked up further, which could help to support the consumer side of the economy. In that regard, retail sales data are projected to have recorded another strong year-on-year growth rate of close to 5 per cent

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Also of interest in the UK will be the latest BoE meeting minutes from earlier this month. Given the tone of recent BoE updates, it is likely that the minutes will continue to show that the MPC remains generally ‘cautious’, concerned about the possibility that a low inflationary environment could become ingrained in the economy.

While the expectation is that the decision to keep rates on hold remained unanimous, markets will be on the lookout for any signs that some committee members may start to vote for a rate hike in the coming months.