Fed expected to hike by 25bps

The main currency pairs are not much changed ahead of the Fed’s interest rate announcement later today. EURUSD and GBPUSD are trading at around $1.1550 and $1.3480 respectively, leaving EURGBP at about £0.8570. The market is almost fully priced for a 25bps hike in interest rates (to a range of 3.75%-4%) by the Fed, so such an outcome should have little enough impact on the dollar, unless the Fed ‘guides’ a shallower path for rates ahead relative to current market expectations (i.e. about 100bps of hikes in total over the next twelve months or so), in which case the currency might lose some ground. It would be a big ‘shock’ to markets though if the Fed opted to keep rates on hold at today’s meeting. This would probably see the dollar weaken off quite considerably, while also inducing near-term volatility in the US bond market with short-dated yields falling but long-dated yields rising.

UK government bonds are outperforming at the start of play this morning, with yields down around 3-4bps or so across the curve, on the back of benign (UK) inflation data released a short while ago. Yesterday saw yields in the main markets end the session flat to very marginally higher. Equity markets, meanwhile, lost more ground, with US and European stocks off around half a percent or so on the day.

Headline CPI inflation in the UK edged up to 3.1% in August, from 2.9% in July, in line with the consensus forecast. The modest increase in headline inflation was due to a pick up in energy inflation, while core inflation was unchanged at 2.6%. Within core inflation, both goods and services inflation held steady at 0.9% and 3.4% respectively, the latter coming in a touch lower than expected (3.5%). BoE rate hike expectations have eased a little post the data, though the market is still pricing in a 25bps increase in rates at the next but one meeting in November (following an expected ‘hold’ at tomorrow’s meeting).

For the day ahead, in terms of economic data, the main releases are industrial production (July), labour costs (Q2) and the ECB’s latest Wage Tracker survey in the Euro area, and retail sales and import prices (both for August) in the US.