Hawkish FOMC Outlook

Daily Analysis - 22/02/2018

FOMC Helps hold Dollar Gains

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Hawkish Comments from the FOMC minutes helped Dollar hold gains for the third day. The GDP released in the UK will be in focus while Brexit negotiations are in a hot turning point.

Hawkish FOMC Minutes


In morning trade on Thursday, Asia markets followed S&P 500 futures lower as speculation of faster hikes in U.S interest rates soured risk appetite globally.

Analysts described the release of the latest Federal Reserve minutes as hawkish which in turn lifted the greenback further away from the 3-year lows experienced last week.

The minutes of the Federal Reserve’s last policy meeting showed the usual concerns that inflation might disappoint, but also an expectation of faster economic growth due to fiscal stimulus. Officials also noted increased economic growth and an uptick in inflation as justification to continue a gradual raise of the interest rates.

The first interest rate hike for the year 2018 in the US is expected in the March FOMC meeting.

The meeting was also the final one for Chair Janet Yellen, who led the Fed as it took the first steps to normalization following years of historic low interest rates. She was succeeded by Jerome Powell, who is largely expected to continue Yellen's strategy of gradual rate hikes.

Meanwhile, U.S. Treasury yields whipsawed following the news. Yield on the 10-year note initially fell from session highs after the release, but recovered to reach a fresh four-year high.

In the currency market, the dollar index, which measures the greenback against a basket of currencies, traded at 90.058, recovering from a previous low of 89.588, though the sudden shift to safety also spurred demand for the Japanese yen.

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The Cable


On Wednesday, the GBPUSD pair briefly jumped above the key 1.40 psychological level after data released from the UK showed wages grew 2.5% in the three months to December, which reaffirmed BOE policymakers' view about strengthening economic outlook. For the first time in almost two years, the UK unemployment rate rose unexpectedly which in turn offset the positive wages and prompted some fresh selling around the British Pound. Even during the NY trading session, the overall tone of the FOMC minutes being hawkish and the pair subsequently dropped to a 6-day low during the Asian session on Thursday.

The UK GDP figures for the last quarter of 2017 could wake up the GBP bulls. The second reading of the UK fourth-quarter GDP is expected to confirm the preliminary growth of 0.5% quarter over quarter and 1.5% year over year.

Brexit talks always offer trading opportunities. The UK Prime Minister will host her most senior cabinet ministers until late Thursday night in an effort to agree on what kind of Brexit trade deal they want with the EU.

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Oil prices drop


Oil prices fell on Thursday, weighed down by a rebound in the U.S. dollar from three-year lows hit last week and an expected rise in U.S. oil and shale gas production.

Traders said the declines were driven by a recovery in the dollar, which potentially hits fuel demand as it makes greenback-denominated oil imports more expensive for countries using other currencies.

The dollar index, which measures the greenback against a basket of six major currencies, rose for a third day on Thursday, moving further away from the three-year lows reached last week.

The U.S. production also puts pressure on the oil prices since now the US is the world’s second-largest oil producer with more than 10 million barrels per day, only slightly behind Russia and ahead of top exporter Saudi Arabia.

The weekly U.S. oil production data are due to be published by the Energy Information Administration on Thursday after a one-day delay because of the President’s Day holiday on Monday.

That data will also include U.S. inventory figures that are expected to show crude oil stockpiles being 1.795 million barrels in the week to February 16. Oil product stockpiles, including gasoline and distillate fuels, are all expected to decline.

Despite the rising U.S. output, overall oil markets remain well supported due to healthy demand growth and supply restraint by the Organization of the Petroleum Exporting Countries that started last year to limit excess global inventories.

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