Good morning,

Steady as she goes

Tonight’s Federal Reserve meeting will be another lesson in Kremlinology with no change in policy expected. Markets believe there is more chance of a Federal Reserve rate cut (4%) than a rate hike (0%) later today and so it is the statement that will definitely see the most scrutiny.

The world hasn’t changed all that much since the December 16th meeting saw interest rates rise for the first time in nearly a decade. Of course, we have seen turmoil in emerging markets since the beginning of the year, inflation expectations remain poor and growth uncertain. The question is will this lead the Federal Reserve to change the language of their statement?

Language to acknowledge volatility

We expect the FOMC to acknowledge this volatility – it would be strange were it not to – but we believe that they will attempt to look through the near term wobbles. Obviously if this volatility in equities/commodities/credit continues, then the Federal Reserve will have trouble looking through the volatility but for now, a little volatility is nothing for the central bank to be overly concerned about.

Any mention of specific risks will largely paint a picture of whether the March meeting – due March 16th – is still live. We also have to think that policymakers will remain robustly confident in the US economy but will be cogniscent of the lack of inflation. For what it’s worth we are looking for the next hike to only come down the track in June.

Dollar is slightly higher this morning and has the possibility to extend these gains should the Fed statement remain upbeat. The decision and statement will be released at 7pm tonight.

Higher Aussie inflation gins dollar

Asian markets have been very quiet overnight although inflation numbers from Australia did give the AUD a little pull higher. Headline inflation, including food and oil, rose to 0.4% in Q4 with underlying inflation that discounts away volatile commodity prices, rising to 0.6%. All in all the inflation picture is still below where the Reserve Bank of Australia would want it and although the numbers have prompted a slight strengthening in Commonwealth currencies, tonight’s Reserve Bank of New Zealand meeting may reverse that in short order.

The RBNZ meeting that could see a 25bps cut to a fresh record low of 2.25% is due at 8pm GMT.

GBP needs GDP tomorrow

Between now and then there is not too much to get excited about although GBP is eking out incremental gains on a day by day basis to take itself further away from the multi-month and year lows it has hit against the euro and dollar this year.

The next big mover for sterling will be tomorrow’s GDP announcement; the initial reading of growth in Q4. I will be discussing this on BBC Breakfast tomorrow morning with our thoughts being that the consumer will still be driving growth here in the UK courtesy of the oil price falls.

Have a great day.

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