The US Dollar has been broadly stable in the run-up to this evening’s Federal Reserve policy meeting. While it has weakened slightly against high-yielding emerging market currencies it has made small gains against developed market currencies thanks in part to a strong set of US housing starts and building permits data for August.
The Fed is widely expected to again cut its policy rate 25bp with analysts likely to focus on the accompanying statement, press conference and updated forecasts, particularly in the context of the sharp spike in oil prices on Monday and ongoing US-China trade war. Markets are currently forecasting a third 25bp rate cut before year-end but at its June policy meeting FOMC members on average forecast that only one rate hike would be appropriate in H2 2019. FOMC members are likely to be divided as to the merits of a third rate hike before end-year.
The GBP/USD cross was under mild pressure in the run-up to the release of UK CPI-inflation data for August at 09.30 and it weakened further to as low 1.244 after figures showed that core CPI-inflation had fallen more sharply than expected to just 1.5% yoy from 1.9% yoy in July. This measure of inflation had been in a narrow range of 1.7-1.9% yoy since October and the fall to 1.5% yoy – the low since November 2016 – has fuelled market pricing for a Bank of England 25bp rate cut. However, given the persistent
uncertainty around Brexit and specifically whether, when and how the UK may leave the EU, the Monetary Policy Council is likely to keep its policy rate unchanged at 0.75% in coming months. GBP/USD has since recovered and is currently trading around 1.248.
