Markets react to new doves at the Fed...

Week Commencing Monday 21st September 2015

Overriding Market Themes

We start this week with the US, where Janet Yellen decided not to raise interest rates at the September Federal Open Market Committee meeting. The decision comes after much anticipation in the markets, especially as it would have been the first time the Fed raised interest rates in nearly a decade. There is an economic case for keeping rates low, especially given the persistent low inflation plaguing the western world. Leading up to the September meeting, economists had called the Fed too eager to normalize rates and that raising rates too soon was a mistake. When the Federal Reserve does start to raise rates however, policymakers have forecast slow increases. In fact, economists had been speculating a usually low increase of a mere 15 basis points as the first hike. Markets remain on side for a hike later on this year, so expect renewed speculation at next month’s meeting! One thing is for sure, with global markets the way they expect more nail-biting ahead!

Moving to the UK, productivity has been lagging behind its G7 peers in 2014 by the most since records begin in 1991. Measured as output per hour worked, the indicator was 20 percent below the average for the rest of the Group of Seven last year, according to a report from the ONS last week. It polled behind the United States, Germany and France by a large margin and was slightly worse than Italy and Canada. The only country where productivity was lower was Japan. The reasons for the weakness in output have become known colloquially as the 'productivity puzzle', with some suggesting part of the UK's problem was the growth in low paid and low skilled jobs in the wake of the financial crisis.


GBP This Week

There is no market impacting data releases from the UK this week, so we expect most Sterling pairs to trade slightly higher over the week. This is primarily down to a hiking path from the Bank of England that should be now more in line with the Fed’s, with many people now expecting a hike in February next year. With this in mind, Expect GBP/EUR to trade higher and potential test the 1.39/1.40 level once again. GBP/USD should be an interesting one as traders react to last week’s news from Janet Yellen.

USD This Week

In terms of economic data this week should be reasonably quiet. We await Existing home sales on Monday which are expected to rise 5.53m, whereas durable goods on Thursday should remain reasonably flat. Finally, second reading of GDP should show a solid print of 3.7 percent for the year.

The greenback should remain on the back foot as the market continues to digest the FOMC’s statement. We have already seen it struggle to push away Sterling from the current 1.55 range it is trading at, with the Euro also remaining robust at 1.12. Many in the market now expect the Fed to refrain from hiking until next year as continued global market turmoil push the doves back into the frame.

EUR This Week

In Europe, we continue to look for Euro area flash composite PMI on Wednesday to moderate, pushing down to 54.1 from a previous reading of 54.2. Manufacturing and services sectors should also post slight declines of 52.0 and 54.2 respectively. Finally on the data front, German IFO should see a slight decline from 108.3 to 107.9.

We continue to see further downside risks ahead for the Euro as growth and inflation continue to push the ECB towards a further accommodative stance.



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