Currency markets are poised ahead of today’s important US Federal Reserve policy meeting with the majority of developed and emerging market currencies broadly stable versus the Dollar in the past 24 hours. The Dollar bounced higher yesterday following the release of very strong Conference Board consumer confidence data for September. The index jumped to a multi-decade high of 138.4 from 133.4 in August, suggesting that the escalating trade war between the US and China has not yet affected buoyant US consumer confidence. The surge in US consumer confidence in the past three months, driven in part by rising real wages, has contributed to an almost metronomic rise in real retail sales growth – which hit 4% year-on-year in August – and in turn to robust household consumption and headline GDP growth which is estimated to have exceeded 4% qoq annualised in Q3.
This economic backdrop has made a 25bp rate hike at today’s Federal Reserve meeting a near-certainty and markets have already almost fully priced in a further 25bp hike before year-end, on top of today’s hike. But the medium-term outlook for the US economy and the Fed’s hiking cycle, and by extension for a Dollar which has flat-lined in the past month, is cloudy given significant event risk in Q4 and the potential impact of the US-China trade war. The focus today will thus likely be on the tone of the Fed’s accompanying policy statement and Chairperson Powell’s press conference and the Fed’s updated economic projections, including FOMC members’ rate hike expectations for the rest of the year and in particular 2019.
