Fed rate announcement today

The main currency pairs bounced around a bit yesterday in response to the latest economic data, but the euro and sterling are both slightly lower against the dollar this morning – at around $1.0810 and $1.2675 respectively, with EURGBP at £0.8530 – ahead of the Fed’s latest policy decision and statement later today.

Bond yields popped higher on the back of the economic data, though US yields reversed course into the close to end lower on the day with European yields following suit this morning. In equity markets, European stocks chalked up modest gains while the S&P 500 ended slightly lower.

The Euro area economy managed to avoid recession in the final quarter of 2023 with GDP remaining unchanged (-0.1% was expected) having fallen slightly in Q3. The economy has essentially flatlined in the past year, expanding by just 0.1% over this period, as higher interest rates have weighed on activity.

There are increasing signs that the housing market in the UK is stabilising. The number of mortgage approvals rose for a third month in a row in December, according to Bank of England data, while the Nationwide measure of house prices posted a monthly increase of 0.7% in January (leaving prices more or less flat on January 2023).

The Fed has been pushing back against expectations for an early cut in interest rates since its last meeting in December, and the strength of economic growth in Q4 (as per last week’s GDP data) suggests it is likely to strike a cautious enough tone at today’s meeting too. It seems only a matter of time though before the Fed begins to ease policy, which no doubt Fed Chair Powell will be quizzed heavily on at the post-meeting press conference.

Economic data due today include the Employment Cost Index (ECI) for Q4 and ADP employment report for January in the US –  the former will provide a comprehensive update on the pace of wage growth in the economy, something the Fed is closely watching.