Federal Reserve formally announce the unwind

The dollar had a particularly strong afternoon yesterday and that’s carried over into today’s session as traders bought the greenback on the back of 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.

The dollar’s still holding onto gains of over 1% following the Federal Reserve meeting and can easily continue although it will need the economic news to work in its favor.

All eyes on May

Tomorrow, UK Prime Minister May will address her European counterparts in a speech that’s expected to outline a newer, rejuvenated approach to negotiations with Brussels to establish common ground over Brexit. With talks currently stalling and the clock still very much ticking, May and her cabinet is coming increasing pressure from not just the wider public but now ministers themselves. Media reports suggest May will concede a €20 billion exit bill, but markets are still unsure as to whether the government will aim to pursue a Norway-style close trade agreement, or something resembling the EU-Canada CETA deal. The outlook for sterling is as it has been for the past year or so: unclear and as political as ever.

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.