US: Fed prepares market for rate rise – HSBC

Analysts at HSBC note that the USD began the September month trending downwards, with the DXY index reaching its lowest level since January 2015 on 8 September and this USD weakness followed soft data and the further escalation of tensions between the US and North Korea.

Key Quotes

“September’s data was generally weaker than expected. Non-farm payrolls released on 1 September came in below expectations at 156k, falling short of the market’s expectation of 180k. The unemployment rate ticked up to 4.4% and average hourly earnings fell to 0.1% MoM, below expectations. On 6 September ISM non-manufacturing also came in worse than expected.  The release of CPI did buck this trend, coming in above expectations at 1.9%. But this weakening trend continued on 15 September with a hat-trick of releases. Retail sales, industrial production and manufacturing production all printed below expectations and the USD subsequently fell.”

“Despite a particularly weak month for data, the FOMC did not give a dovish signal at its meeting on 20 September. The unchanged rates and formal announcement of its balance sheet reduction was broadly expected by the market. However, the Fed left its median ‘dots’ unchanged for 2017 and 2018 rather than adjusting them lower, which saw the USD rally sharply by around 1%. This meant the Fed continued to expect one rate hike before year-end and a further three hikes in 2018. On 26 September, Fed speeches reinforced the outlook of the ‘dots’, helping the USD to extend its rally. The new Atlanta Fed president Raphael Bostic noted that he would be ‘comfortable’ with a December rate hike before Chair Janet Yellen indicated the FOMC was still on course for a further tightening of monetary policy.”

“Geopolitical tensions did weigh on the USD at the beginning of the month but this was not sustained. The USD opened lower on 4 September following the news over the weekend that North Korea had conducted a nuclear weapons test. Further geopolitical developments over the month also saw the USD weaken, such as the news emerging of a missile test over Japan on 15 September. However, the FX market was less attentive to these developments than it had been in August, as the FOMC meeting and tax reform progress stole the focus as the month progressed.”

“The USD continued its upward trend at the end of the month as President Trump announced a new framework for tax reform that would see corporation tax cut from 35% to 20%. The DXY index, having started the month at two-year lows, sprang into life and ended the month up 0.4%.”