Financial market research and analysis

In addition to the priced in, 25 basis point hike, there were also plenty of other encouraging noises from the Fed last night. For example, the central bank increased growth projections from 2.4% to 2.5%; the dot plot (the future path of interest rates) continued to point to, three hikes next year. The inflation forecast was kept steady, the unemployment rate forecast was lowered to 3.9%. Yet the dollar fell. The dollar looked past these hawkish indicators to focus on low inflation concerns, which just aren’t going away.

Inflation fears dominate the market not the fed

Fed policy makers voted 7 – 2 in favour of raising rates, with the two dissenters, Evans and Kaskari, representing concerns over stubbornly low inflation. Fed Chair Janet Yellen also hinted that low inflation could be more ingrained than temporary. The Fed meeting was set to a backdrop of disappointingly low core consumer price data, released earlier in the day. Core CPI showed that prices, excluding volatile food and energy components, ticked up a dreary 0.1%, down from 0.2% in October.

Fears over low inflation appear to be concerning the market more than the Fed right now. The Fed still believes it will hike three tines next year, the market is not so sure that this is achievable while inflation refuses to tick higher. Whilst the Fed Funds did not actually register a change following the meeting, the selloff in 10-year Treasury yields and the tanking of the dollar tell us that investors were not convinced by the Fed.

Now there is a long waiting game ahead, which the dollar may struggle to cope with. With no action expected from the Fed in January, it won’t be until mid-March when Powell chairs his first policy meeting that the dollar will get forward guidance.

Market reaction

The dollar index closed Wednesday 0.67% lower at 93.47. The dollar could continue to lose ground in the absence of any fresh trading catalysts, especially given that a US tax reform bill announcement on Wednesday failed to spark a reaction from the buck. Thursday’s retail sales may provide the next opportunity for dollar bulls.

US stocks gave a mixed performance, the Dow charged to yet another all-time high. Meanwhile the S&P was pulled sharply off highs by weaker financials in response to the Fed meeting.

One Down Two To Go – BoE & ECB

With the Fed meeting safely in the rear-view mirror investors will now focus on the two central bank rate decisions today; the Bank of England (BoE) and the European Central Bank (ECB).

The BoE only raised rates last month, so no action is expected today. There will be no press conference following the meeting, so the impact of this months MPC could be limited and investors will have to rely on the meeting minutes. Of particular interest, investors will be listening closely as to what impact the BoE sees the recently agreed Brexit deal having on the economy and interest rate projections.

A holding tone is most likely from Mark Carney & Co. The recent Brexit deal, six-year high level of inflation and the uptick in wages are unlikely to waver the BoE, who will be looking to analyse the impact of the first-rate hike in a decade, with no intention of further hikes until late next year, at the earliest.

The pound successful broke through $1.34 on Wednesday and has momentum on its side. Given the weak state of the dollar, even a lacklustre update from the BoE may not knock GBP/USD from its current uptrend.

A quick word on the ECB

The ECB is not expected to hike rates today either. ECB President Draghi is due to hold a press conference. Given that the ECB tapered its QE programme in October, no changes are expected. Draghi has also made it very clear that no rate hikes will happen until the QE programme has concluded. Therefore, ECB economic projections will be the central focus to today’s meeting, especially given the eurozone’s stellar year. Optimism from Draghi could see the EUR/USD capitalise on dollar weakness and move comfortably back towards $1.19.