Currency Note

Market bets on four rate hikes

By Paul Redmond February 28th, 2018

four rate hikes

Yesterday, the new Federal Reserve Chair Jerome Powell told the US House Banking Committee that borrowing costs should rise to keep inflation under control, and that he expected further gradual interest rate rises. While he did not specify whether he thinks there will be three or four rate hikes in 2018, he did say that since three rate rises were projected, there has been an increased strengthening of the US economy. The markets certainly took this to mean that there would be four rate hikes and the dollar strengthened against the euro and sterling.

In Europe, the main release was the preliminary German inflation rate which is taken to surprisingly slow to 1.4% year-on-year in February 2018. It had been expected to drop from 1.6% in January to 1.5%, but it actually came in below that to hit its lowest rate since November 2016.

The key release today is the second estimate of the US GDP growth rate for the fourth quarter of 2018. This will provide us with a real indication of how the US economy fared towards the end of last year and might even serve to further bolster market consensus of four rate hikes in 2018. Having said this, Powell’s comments yesterday will likely take precedence over market consensus – even if GDP growth comes in below forecast.

It is also worth noting that the Italian elections take place this Sunday, following the dissolution of the Italian Parliament on 28 December 2017 and we could see some euro volatility as a result. It appears as if the pre-election coalition between Silvio Berlusconi’s centre-right party Forza Italia, the xenophobic Northern League, and the far-right Brothers of Italy has a chance of victory. For more key political and economic events to look out for in 2018, take a peek at our Key Dates for Your Diary 2018 infographic.

GBP: economic growth may have eased in early 2018

There were no economic data releases in the UK yesterday, although Moody’s Investors Services published its latest Brexit Monitor on Monday which said that UK economic growth may have eased in early 2018.

The report said that retail sales remained sluggish in January, but employment growth remains positive. Importantly, it suggests that the fact that the UK and EU have a shared interest in avoiding a ‘no deal’ scenario means that the terms of the transition period will likely be agreed.

Sterling traded sideways against the euro for the second day in a row, but it did weaken further against the dollar following Fed Chair Powell’s comments about the US economy and interest rate rises in 2018.

Today we have the Gfk consumer confidence for February. It was -9 last month and is expected to dip a little to -10. In addition, we will see the Nationwide house prices.

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EUR: German inflation rate comes in below forecast

The main release in the eurozone was the German inflation rate figure which came in at 1.4% which was below the 1.5% expected. It was quiet for the euro against sterling, but the single currency weakened against the dollar following market speculation of four interest rate rises in the US this year.

There was a raft of economic data from across the eurozone yesterday, as we saw the services, industrial and economic sentiment readings. Services sentiment came in better than expected at 17.5, when 16.3 had been forecast; industrial sentiment was as predicted at 8.0; and economic sentiment came in at 114.1 against an expectation of 114.0. Business confidence was also slightly better than forecast at 1.48 when 1.47 had been forecast. Overall, a set of healthy readings.

Today we have the German Gfl consumer confidence for March and we will also see the unemployment figures for Germany. In light of what European Central Bank President Mario Draghi said on Monday, it will be interesting to see what the eurozone’s inflation rate flash reading is for February when it is released later today. It was 1.3% in January and is forecast to dip to 1.2%.

USD: US GDP growth rate set for release today

New Fed Chair Jerome Powell said he backed gradual interest rate rises yesterday and appeared to suggest there could be four interest rate rises in 2018. While he didn’t go as far as explicitly stating this, he did say that since three hikes were projected the US economy has strengthened. The dollar strengthened against the euro and sterling soon after, with the dollar index hitting a five-and-a-half-week high during his testimony.

The main economic data release in the US was the durable goods orders which slumped by 3.7% month-over-month in January 2018. This followed a revised 2.6% rise in December 2017 and came in way below expectations of a 2% drop. It is the biggest decline for six months.

On what is a busy day for economic data, the key release is the second estimate of the US GDP growth rate for the fourth quarter of 2017. The first estimate put the figure at 2.6% from 3.2% in the third quarter, but it is forecast to be revised downwards to 2.5%. It will be fascinating to see what the actual figure is, especially given the recent eurozone (2.7%)
and UK (1.7%) GDP growth rate figures. In addition, we will see pending home sales for January.

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