Hopes for higher US interest rates dashed – 17th March 2016

Hopes for higher US interest rates dashed

In yesterday’s budget, George Osborne did a reasonably good Robin Hood impression, taking from rich companies to give to poorer ones and hitting the manufacturers of sugary drinks with a tax that will generate £520m for the Treasury in 2018. Sterling didn’t do too well, dropping off during the speech. UK employment data didn’t help Sterling either; higher-than-expected wage inflation saw total earnings 2.1% higher on the year and unemployment was steady at a six-year low of 5.1%. All so so but not enough to encourage investors to buy Sterling.

As a result, Sterling spent another day at the bottom of the pile falling by an average of 0.5% against the other dozen most actively-traded currencies. That equated to a loss of one Euro cent, two Australian cents and three and a half cents to Wednesday’s leader, the NZ Dollar. Sterling’s only gain was the cent it took from the US Dollar.

The US Dollar woes were due to the Federal Reserve; every time the FOMC publishes its monetary policy decisions it includes a chart that indicates where individual committee members would like to see interest rates in the future. Yesterday’s chart showed less appetite for higher rates this year and provoked a sell-off for the US Dollar.

The “dot plot” (so known because each member’s preference appears as a dot) kicked into touch any remaining notion that there could be four rate increases this year. It appeared to point to just two hikes, and investors are far from convinced that the Fed will deliver even that. Those doubts cost the US Dollar a cent and a quarter against Sterling and the Euro. It was the day’s weakest performer among the majors.

In the lead, the NZ Dollar strengthened by 1.6% against Sterling and by 2.4% against the US Dollar. The US rate outlook was a big help to the Kiwi Dollar (as it was to the other commodity dollars) as were figures that showed New Zealand’s economy expanded by 0.9% in the fourth quarter of 2015.

There is more central bank action today from the Bank of England, the Swiss National BanK and Norway’s Norges Bank who all make policy announcements today. Two of them are expected to leave their benchmark interest rates unchanged with expectations that the Norges Bank won’t. Investors believe it will reduce interest rates by 0.25% to 0.5%.