Fed Minutes support stronger USD

18th October 2018 Market Update

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?? USD - The significant FX news out of the US yesterday centres around the minutes of the Federal Reserve’s September meeting as well as the US Treasuries semi-annual FX report. As part of the minutes, we saw a hawkish-led Fed continue to tout the need for a more restrictive interest rate policy going forward as the economy continues to outperform. As such, a December rate hike looks increasingly likely (83%), while a further three rate increases next year are still very much on the table; we saw the Dollar strengthen yesterday as a result. However, if we were to see the US economy slowdown as the effects of Trump’s fiscal stimulus begin to have a less marked impact, alongside a higher interest rate environment; we could well see the Fed’s plans change. In addition, as part of the US Treasury semi-annual FX report, the US refrained from labelling China a currency manipulator in what many hope could be the start of reduced tensions despite the ongoing trade war.

?? GBP - Yesterday’s EU summit was as expected, a non-event following news earlier this week that negotiations were likely to go on into November at the earliest, as both parties struggle to come to an agreement over the Irish border. In terms of updates, we saw a more conciliatory tone from Prime Minister Theresa May as well as an EU proposal to extend the transition period by one more year, which points to a continued willingness of all of all parties to reach a deal. The issue with this latest proposition is that it keeps the UK in the EU for another year, which is something many, including a number of vocal Tory MPs – cannot abide. In terms of the impact on Sterling, the summit caused a largely muted move on the market given that many had been forewarned of its impotency.

?? EUR - Italy’s right-wing Deputy Prime Minister Matteo Salvini has been stealing the headlines in Europe with a series of antagonising quotes out yesterday which included threats to veto the renewal of sanctions against Vladimir Putin’s Russia following their annexing of Crimea. He deemed the sanctions to be ‘economic, social and cultural madness.’ In addition, Salvini branded France an ‘international disgrace’ for having driven two migrants across its border and then leaving them in Italy, in what France has since claimed was an ‘honest mistake’. All of this inflammatory rhetoric is an interesting tactic for someone who was also quoted as saying he may consider running for the presidency of the European Commission at the next elections in May. As if that wasn’t enough, Salvini also claimed that the Italian budget plan would not be changed in another statement that acts as a complete disregard of those in Brussels. As such, it appears that a confrontation between the EU and Italy is not only forthcoming, but has the potential to run and run given Salvini’s controversial disposition.

 

Summary: 
USD: The Dollar remains well supported by the Federal Reserve’s Meeting minutes which indicate a continued support for tightening across all FOMC members;
GBP: Brexit Summit a non-event as expected, with talk of an extended transition period adding little in terms of a solution;
EUR: Italian Deputy steals headlines with a series of inflammatory claims which doesn’t bode well for EU-Italy Budget negotiations.

 

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