The big day has arrived, and the dollar has already begun to rally. The announcement will be at about 7pm GMT. As discussed before the key thing to watch out for is not the expected rate rise itself but the wording of the FOMC’s statement. We believe that the FOMC will announce its intention to effect a moderate tightening cycle given the strength of the US domestic economy and labour markets. Earlier on in the week, core CPI was published showing a year on year rise of 2%, which is the rough target for the Federal Reserve. The FOMC could rightly argue that continuing strength in the labour market and growing domestic economic activity will mean that inflation is likely to rise about this target area in future if a tightening cycle is not implemented. This makes a lot of sense, no central bank would like to be caught reacting to inflation after the fact, that never ends well.
Risk markets look fairly calm at the moment, and so for now there is not much to say, the key is to observe the FOMC statement, and monitor how the markets react to it. On the other side of the pond, Bank of England officials continue to reiterate a more cautious approach to the level interest rates. The deputy governor recently indicated that she will not vote for a rise until she sees more evidence of wage growth. The sense is that the earliest a rate is likely to occur will be the middle of 2016, but once the hiking cycle begins it could well be more aggressive than that of the Federal Reserve. It’s no surprise that the pound sterling is underperforming the US dollar at the moment.
It would be wise to expect fairly large moves over the next 24 hours. The mix of uncertainty, diverging policy and the proximity to the holiday season leaves us with the potential for some decent volatility. Trade with caution, and always have in mind that risk mitigation is the sensible course to take.
Finally, in other news, the central bank of Nigeria (CBN), is imposing another restriction. Street hawkers of foreign exchange are to be banned from the beginning of next year. You know the ones, those who stand outside the big hotels, and offer to swap your dollars or pounds or euros into naira. There will be severe punishments from January 1st 2016. This is what comes of having a retail banker as central bank governor I guess. The other way to get rid of the street hawkers is to get rid of the parallel market and just let the naira find its own value, but I guess that’s not happening any time soon!
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