Markets overview. Bank of England in focus after Fed raises rates

forex_news_gbp_8Last night the Federal Reserve raised rate interest rates, for the fourth time in the last 12 months pushing the Fed funds rate up 25 basis points to 1.5% to 1.75%. This was a widely anticipated move and no surprise, with investors much more interested in the Fed’s forecasts for the economic outlook, as well as their expectations for further rate rises.

There had been an expectation that the central bank would signal its intent for a higher pace for rate rises in 2018, however this always seemed optimistic, with policymakers keeping the prospect of three rate rises intact for this year, while upgrading the prospects for 2019 from two to three increases. The Fed also upgraded the growth outlook for this year and next.

At this press conference the new Fed chief cut an optimistic figure about the US economy, however the statement did suggest that the Fed did have some concerns with a slight tweak to the language which downgraded the description of economic activity from “solid” to “moderate”

This seems entirely sensible in light of recent data on the consumer side which has seen retail sales decline for three months in succession.

Despite this fairly upbeat tone US markets finished the day lower probably more as a result of the announcement earlier that the US would outline a series of tariffs later this week aimed at cracking down on Chinese theft of intellectual property, in what could be the opening shots of a new front on the current battles on trade policy.

With the EU also announcing that they were looking at implementing a new tax policy designed to levy a charge on revenues as opposed to profits. The tax would on companies with a turnover of over $750m and would be 3% and aimed at primarily US social media companies who tend to shift their profits around in order to minimise their tax bill.

The timing is particularly notable given current tensions between the US and EU over trade and would be further ratchet up those tensions. It is also an extraordinarily crude and clumsy way of dealing with the problem when the answer is very much in the EU’s hands. If the EU had a harmonised tax policy US companies wouldn’t be able to shift their profits between Ireland and Luxembourg for example, and would then have to pay the headline rate. Rather than deal with the shortcomings of their own monetary union the EU prefers to implement a policy that could well drive business away.

It’s also Bank of England day, and while no changes in policy are expected, yesterday’s wages and unemployment data have shifted the calculus on a possible move on UK rates to the May meeting, when we get the next inflation report. By then the gap between wages and headline inflation could well have narrowed further and would be an ideal window for the central bank to edge rates up by another 25bps

Before that we also get the latest retail sales numbers for February in what can be a fairly volatile set of numbers. These are expected to show a rise of 0.4%, an improvement on the 0.1% rise seen in January.

In Europe concerns that we may have seen the high spot in economic activity could well be reinforced with the latest flash manufacturing and services PMI’s from France and Germany. These are still expected to be strong, however they have been slipped in recent months and are expected to come in at 55.6 and 57 for France and 59.8 and 55 respectively for Germany. The latest German IFO Business climate survey is also expected to soften to 114.7, particularly in light of concerns over a possible trade war.

EURUSD – rebounded from the 1.2235 area but remains below the trend line from the recent peaks which comes in at 1.2370. While below here the risk remains for a move back to support and on to 1.2160. Above 1.2370 reopens a move to 1.2420.

GBPUSD – managed to hold above the 1.3980 area and we’ve subsequently broken above 1.4080 and look set for a move towards 1.4250. Only a move below 1.3970 runs the risk of a return to the lows last week.

EURGBP – looking set for a retest of the 0.8690 area a break of which has the potential to see a broader move towards the 0.8500 level. We need to see a move back through 0.8820 to retarget the recent peaks above 0.8920.

USDJPY – struggling to rally meaningfully with support coming in between 105.20 and 105.50. A break here could well signal further losses towards 100.00. We need to push beyond 107.20 to suggest some form of base is in and retarget a move back to 108.30.

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