Dollar softer post Fed
The Fed left interest rates on hold for a second meeting running yesterday, as expected. Market expectations that it is now essentially done hiking and will lower rates during 2024 hardened post-meeting, contributing to a fall in US bond yields and a modest decline in the dollar, which is trading at around $1.06 and $1.2170 against the euro and sterling respectively this morning (this leaves EUR/£ largely unchanged at around 87p).
US 10-year yields fell further following the Fed meeting, have declined earlier on the back of weaker than expected economic data and lower than expected Treasury bond issuance, ending the day down around 20bps at 2.75%. Equivalent German and UK yields closed marginally lower yesterday at 2.75% and 4.50% respectively.
The Fed kept interest rates in a range of 5.25%-5.5% at the conclusion of its two-day meeting. It acknowledged progress to date in lowering inflation and said the recent tightening of financial conditions, if sustained, will dampen growth and price pressures. However Fed Chair, Powell, said the central bank is not yet fully confident that monetary policy is “sufficiently” restrictive to get inflation back to the 2% target – hence the question it is asking is whether it will need to raise rates any further, the answer to which will depend on the economic data as it comes to hand.
Attention now turns to the Bank of England (BoE) as it announces its latest interest rate decision at noon today. The vote to keep rates on hold at 5.25% in September was a close call (5-4), and today’s outcome may also be final balanced. Inflation remains elevated and well above target at 6.7%, but the economy is weakening and the labour market is loosening. Inflation is likely to have dropped quite sharply in October as lower domestic energy bills kick in – the BOE’s most recent forecast sees it declining to around 5% in Q4, still well above target but perhaps enough to persuade it to keep rates on hold again today.
Economic data due today include a final manufacturing PMI reading for October in the Euro area, and factory orders and unit labour costs in the US.