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Expectations Rising for Rate Hike

December rate hikes gained more prominence last week as Janet Yellen testified to the Senate that the Federal Reserve would decide on interest rates at the December meeting. The hawkish view found support as the October monthly jobs report from the US was surprisingly bullish.

Weekly Review

The US Dollar finished a second week with gains since the Federal Reserve surprised the markets by coming out with a hawkish statement at the October Fed meeting. The hawkish view was maintained as Janet Yellen testified to the Senate last week. While expressing concerns on inflation, Ms. Yellen noted that the Fed wanted to see further slack in the labor markets to be absorbed while calling December a 'Live Meeting.' When asked how the Fed would decide on hiking interest rates, the Fed Chair noted that the interest rate decision would be data dependent. The markets got a glimpse of this data on Friday as the October jobs report came out with strong numbers. The monthly jobs increased 271k, beating the conservative estimates of 181k while the unemployment rate dipped to 5.0%, marking full employment alongside a pick up in the average hourly earnings as well. The US Dollar ended the week with strong gains as EURUSD dipped to a 6-month low closing the week at 1.0743. The British Pound, along with the Euro remained subdued, but the surprise was from the Bank of England. Although interest rates were left unchanged at 5.0%, the BoE’s inflation report saw the bank give out dovish forecasts on inflation remaining at 1.0% levels into 2016. The market expectations for a rate hike in 2016 took a hit as a result with the British Pound selling off strongly.

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The Week Ahead

The currency markets are relatively quiet the coming week with the major economic data coming from Australia and the UK. Australian unemployment rate is expected to remain unchanged at 6.2% but a pick up in the employment change is expected at 15.2k. The RBA, in its recent statement of monetary policy was hawkish in the labor markets and a surprise beat on estimates, especially the unemployment rate could help support the Aussie. Australia's unemployment data is due for release on 12th November. The UK's jobs data is due on the 11th of November and the market estimates the UK's unemployment rate to remain steady at 5.4%. Focus will be on the average hourly earnings which is expected to rise 3.2%, after increasing 3.0% previously. A beat on the median estimates on the jobs could help the British Pound recover some of its losses from last week. BoE's Carney is also due to speak later in the day, holding a press conference on the inflation report which is likely to keep the British Pound volatile. From the US, core retail sales and PPI numbers are due but no major releases are expected as the US Dollar continues to stage steady ground. Data from Eurozone is quiet with German GDP numbers and quarterly flash GDP estimates from the Eurozone. Mario Draghi will be speaking at an event in London this week but not much is to be expected especially with a stronger Dollar now in control.

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