FOMC eludes to a rate hike sooner than initially thought

On a day with no UK data released, sterling made further gains against the struggling euro, yet remained decidedly range bound against the US dollar. The main event of the day took place late in the evening when Bank of England governor Mark Carney stated that interest rate hikes in the UK would be more gradual than anticipated. With pressed on the issue of low inflation, Carney seemed to have prepared a response highlighting that the generalised inflation pressures are currently low principally owing to oil prices. He further reiterated that the low inflation is likely temporary and should be viewed as beneficial to households, while stating that the inflationary pressures should pick up again in 12 months. GBP/EUR has breached the 1.3400 interbank rate marginally while GBP/USD has been pushed back towards 1.5100 IB. An absence of top-tier data in the UK for the remainder of the week means we can expect sterling movements to be dictated by events elsewhere alongside ongoing speculation regarding a potential rate hike and time scales.

With no data released form the Eurozone yesterday, movement seemed to be centred around New Greek PM Alexis Tsipras and his statement that Greece will not default on its debt obligations. At his first cabinet meeting since the election victory on Sunday Mr Tsipras continued to pledge his commitment to negotiate with creditors over the €240bn bailout. The implication form the Eurozone is that the new anti-austerity coalition in Greece seems to be gearing up for an inevitable clash with international creditors. Indeed, the German vice chancellor has already warned Greece that other states would not pick up their bills. The current tête-à-tête between the Greek politicians and international creditors has come at an unfortunate time for the troubled Eurozone, and has only increased uncertainty in the ailing region – to the detriment of the single currency. Data released today from the Eurozone mainly focuses on Germany, with the German Prelim CPI m/m and German Unemployment Change the main events. The German CPI data is expected to paint an extremely poor picture for the powerhouse economy, with inflation expected to drop to -0.8%, a figure not seen post 2007.

As expected the Federal Reserve left interest rates unchanged last night, alongside noting that the central bank will be patient “in beginning to normalize the stance on monetary policy”. The meeting and statement showed little change and no real market surprises. However, the Fed reiterated that US economic activity has been expanding at a ‘solid pace’ (in December the wording used mas ‘moderate’). Regarding inflation the FOMC anticipates a further decline in the short term but are purportedly still on target for it to rise toward the 2% target in the medium term. The strategic use of wording on economic activity and the fact that inflation is supposedly on track have reignited speculation that the FED may raise interest rates sooner rather than later. A plethora of discernible data is released across the pond today. The release expected to cast the largest shadow over the market is the US unemployment claims data, which is viewed as an important signal of overall economic health owing to the fact that consumer spending is highly correlated with labour market conditions. This data will be analysed by market participants in order to diagnose the effect recent employment conditions will have on any proposed Federal Reserve rate hike this year.