Daily Market Update

All Eyes on Wednesday’s Fed Meeting

September 18, 2017

The U.S. dollar experienced some ups and downs last week. The greenback found support over speculation of a tax reform deal and rising consumer inflation data, but gave back some of those gains on Friday following a soft retail sales report.

USD

The U.S. dollar experienced some ups and downs last week. The greenback found support over speculation of a tax reform deal and rising consumer inflation data, but gave back some of those gains on Friday following a soft retail sales report. While today’s economic docket remains light, this week’s schedule should cause increased volatility in currency markets.

The biggest risk event this week will be the Federal Reserve’s interest rate announcement on Wednesday afternoon. There is only a 2% chance the central bank will raise interest rates this week, but traders will look for signs on future policy. The Federal Reserve has raised rates twice this year and three times over the past twelve months as the labor market has recovered from the Great Recession. However, chronic low inflation has put the Fed in a tough spot. Last week’s report of an uptick in consumer inflation was a welcome sign and stoked new speculation that Fed will find the scope to raise rates later this year. There is currently a 50% chance it will hike for a third time in December.

Market participants are also expecting the Fed to announce its plans on how it plans to unwind its bloated $4.5 trillion balance sheet. An aggressive plan to sell of its bonds and other investments to bring its debt back to reasonable levels could spark the greenback.

 

EUR

The Euro remains out of the spotlight where is has held familiar ranges against the U.S. dollar for the past week. Eurozone CPI was finalized at 1.5% year over year in August, unchanged from its first reading. Core prices remain deflated at 1.2%. Traders did not react to the news likely in deference to the U.S. Fed’s interest rate decision later this week.

 

GBP

The British pound rallied nearly 3% last week and touched levels not seen since the day after the Brexit vote last summer. However, the sterling has given back some of those gains in early trading today on presumed profit-taking. The pound had found support as the Bank of England signaled it is likely to withdraw stimulus “over the coming months.”

Later this morning, Bank of England Mark Carney is scheduled to peak in Washington. With speculation swirling about the timing of a BoE rate hike, his comments will be parsed with particular attention.

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