Good morning

Anarchy in the FOMC!!! No not literally. The minutes of the FOMC were published last night and it was noted that NUMEROUS members voted in favour of raising rates in June 2015 while a COUPLE wanted to wait until 2016. Numerous is between 2-4 while a couple is 2 making a total (potentially of 6) meaning that of the 12 members of the FOMC, a gap was opening (the remaining 6-7 members obviously were voting for a hike between September and December). So it would now appear that we have 3 camps forming within the FOC, June, Sept-Dec and 2016. I have to hold my hands up and apologise. As you know I have been saying that the FOMC COULD in fact hike in MAY 2015….with the strong USD and disappointing NFP last week I accept that that will not happen now and there will be no surprise announcement. If I had to pick a date perhaps a surprise hike in July (29th) when liquidity is thinner. Failing that the next meeting is in September (17th). Given that the FOMC have indicated that rate hikes will be gradual and small in number in 2015 one would think Sept & Dec a 0.25% each and then a wait and see hold. This sent the USD back into overdrive falling from 1.0865 down to current levels of 1.0735 (just above the low for the day as per the chart). As i mentioned yesterday, I just cannot see what will drive the USD lower (through 1.10). Every time the USD over the past few weeks has surrendered and fallen to 1.10 the market simply piles in and buys more USD pushing the USD back. The USD’s momentum remains strong overall and with instability over Greece (funny Tsipras was in Moscow of all places), Iran, Oil prices, and Chinese slowdown all roads point to a continued strong USD. PARITY PARITY PARITY. 

Bank of England announce their interest rate decision today. No change is expected nor any change to the vote’s distribution. It remains 9-0 in favour of keeping rates unchanged. No doubt the depreciation of the GBP and the uncertainty of the elections not to mention inflation at 0% is certainly giving the BoE some food for thought. In terms of my predictions for the GBP, as I wrote yesterday the chances are we will see neither party win a majority and it is this uncertainty that will punish the GBP. Having said that the GBP ROSE against the EUR from 0.7330 (1.3642) to 0.7250 (1.3793) on the back of the weaker EUR – and that is IN SPITE of better Industrial Production and Trade Balance numbers out of Germany this morning. If you have to hedge I would seriously consider doing at least 35-50% now and lock in these rates. Uncertainty is adding to the already highly volatile currency rates. Just looking at the vols market, 1m GBPUSD is trading 12.70/12.90 with the curve down sloping 2m 11.65/12.05, 3m 11.25/11.55 and 1y 9.90/10.20. In fact the GBP curve 1m-6m is trading OVER EURUSD which I can tell you is a VERY rare sight indeed. What this tells me and what it should tell you is the market is anticipating a volatile time in the GBP not only ahead of the elections but more importantly after the results are published and we find out who will run the country until 2020. A conservative win will see vols get crushed as the market LIKES the result with GBP strength anticipated, however a Labour/SNP win will see vols climb even higher as the market DISLIKES the result and the GBP gets a beating. In summary, I would make sure you have complete control over you FX needs so that you do not encounter any unnecessary shocks on the 8th May.

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