Good morning,

USD: A hike but a dovish one

The final Federal Reserve meeting of the year takes place this evening in Washington with expectations of an increase in interest rates to be met. An increase in the Fed Funds rate would be the fourth of the year and would take interest rates in the US to 2.25%.

Some uncertainty over whether the Fed will pull the trigger tonight has set in the past month or so following falls on equity markets and concerns over the global growth picture in 2019. We think this is incorrect as the economic data from the US has remained strong although lower than where it had been at the beginning of the year. Even so, wages are growing and inflation is in and around the Federal Reserve’s target; despite the political pressure that President Trump’s Twitter feed may exert, interest rates should be moving higher for now.

Looking forward, currently, markets expect a solitary rate hike in 2019 with the Federal Reserve instead looking for three. Someone has to be wrong. We think both are and instead look for two hikes – March and June – to top out the Fed’s current tightening cycle.

The dollar slid yesterday as investors came round to the belief that while rates will head higher tonight, the guidance and language that the Federal Reserve uses to frame its positioning for 2019 may be a little softer than what we have heard so far in 2018.

We expect the dollar to remain relatively quiet until the rate decision at 7pm.

GBP: Inflation to fall on cheaper fuel

Finally, we have some economic data to focus on and we hope that it is enough to shift the narrative away from Brexit.

We expect that the headline rate of inflation as measured by CPI will slow once again in November, slipping to 2.4%. Most of the weakness will come from falls in fuel prices and, although wages are running higher, they are not bringing about higher prices just yet.

On the basis that we get a Brexit deal and inflation remains close to the Bank of England’s 2% inflation target, we see two interest rate rises from the Bank of England next year, likely in May and November.

On Brexit, all of the opposition parties apart from the Labour party have tabled a motion of no confidence in the current government. Were Labour to join the motion then a vote would be necessary but, as it stands at the moment, the government is under no obligation to respond.

Sterling will likely continue to trade listlessly until some certainty is felt – one way or the other.

EUR: Deal reached in Rome?

The single currency is rallying this morning after media reports overnight that the EU and Italy are set to come to an informal agreement on the country’s budget plan. Granted, these reports are coming from Rome and not Brussels but the single currency has taken them to heart ahead of a meeting between the two later today.

For now, have a great day.