Good morning,
USD: Fed begins program to reduce stimulus into the US economy
The dollar had a good evening and Asian session overnight as traders bought the greenback strongly following the latest Federal Reserve meeting. While interest rates remained on hold the Federal Open Markets Committee announced that it will begin the unwind of its balance sheet in the coming years.
Yellen’s comments were more hawkish than we had expected saying that “the steps that we’re taking to normalize monetary policy are well-justified given the very substantial progress we’ve seen in the economy.” While she also suggested that the fall in inflation this year was a “mystery” she strongly hinted that another interest rate rise will be seen this year. Certainly for an economy with trend inflation and ultra-low unemployment, reason would suggest that interest rates are too low.
President Trump was quiet yesterday which was a surprise given a slight uptick in his approval rating in the past week or so. He is still at historically low levels and the increase is a bump not a spike but an increase all the same. Trump has apparently made a decision on the Iranian nuclear deal, but will not say what it is. Such is the world we live in.
Dollar has put on just under a per cent following the Federal Reserve meeting and can easily continue although it will need the economic news to work in its favour. Today’s jobless claims numbers will still be affected by the aftermath of hurricanes Harvey and Irma.
GBP: Retail bolts sterling higher
Yesterday’s retail sales numbers from the UK were also a surprise but it remains to be seen whether it is a positive one or not. Sales rose by 1% on the month against an expected increase of 0.2% with strong growth across the sector. Given the wage and inflation picture in the UK the situation is rather puzzling and we will have to hold our thoughts on how sustainable the retail picture is in the UK until we receive the latest round of consumer borrowing numbers a week tomorrow; if the increase is not coming from pay then it has to be coming from credit or a further reduction of household savings, neither of which is a positive. Theresa May is back in the UK this morning and will brief the Cabinet on her speech on Brexit due tomorrow in Florence. We expect that some of this will leak as the day goes on but hopefully sterling will not succumb to the BoJo yoyo again.
The Day Ahead
Mario Draghi is today starting a run of three public appearances in as many working days while ECB members Praet, Constancio, Coeure, Lautenschlaeger and Mersch are also due to speak. Why does this matter? While only a few of the speeches will focus on monetary policy some hints on what the ECB is thinking of when we come to policy at the October meeting. As told by Draghi at the Bank’s meeting this month, the meeting on October 26th is where the ‘bulk of decisions’ on how to shape stimulus within the recovering economy will be made.
Draghi speaks at 2.30pm.
Have a great day.
Jeremy Cook, Chief Economist