Investors shifted into the USA unit after New York Fed president William Dudley said there was a strong case for borrowing costs to rise, while his San Francisco counterpart John Williams expects such a move to get “serious consideration” when the bank meets this month.
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Coupled with the outlook of even a few months ago, when fallout from the Brexit vote by the United Kingdom raised the risk of a fractured European Union, the global economic news has been relatively encouraging.
“There’s no question that animal spirits have been unleashed a bit post the election”, he said in an interview on CNN International on Tuesday, before United States president Donald Trump spoke in Congress. Dudley’s remarks added to a recent chorus of Fed speakers who have ratcheted up expectations of a March rate increase.
Sterling sank to a six-week low of $1.2881 on Wednesday as disappointing economic data added to political nerves that have begun to weigh on the currency again after last year’s Brexit vote.
This could also all be a dip of the toe in the policy waters to see whether the markets are open to rate rises now or whether there will be some form of tantrum; so far the reaction has been more towards the former.
As a result, the GBP/USD exchange rate starts the new month at 1.2378 having fallen from 1.2587 at the start of the previous month. Brainard said she felt the Fed’s security holdings should be left as they are for now, given a “subordinate” role to raising rates. “Once you’ve decided that, you need to take advantage of those windows when they present themselves”.
A green light from the wage data would do more than significantly raise the probability of a March rate hike.
Not all Fed watchers were so convinced.
“We have seen fairly consistent hawkish noise coming out of the Fed”, says Saxo Bank’s FX strategy chief John J Hardy.
“These could certainly be seen as opening overtures as the Fed tries to set the tone for the markets”, he said. Yellen’s “is a voice that really needs to be heard from before we cement the possibility of a move”. This news also contributed to the lower gold price, as improving economic fundamentals decrease investor appetite for safe-haven assets and lend support to the dollar.
Atlanta Fed’s GDPNow: US iconology growing at 1.8% in Q1 vs 2.5% on Feb 27.
“We will continue to edge closer to our goals in the months ahead. The last thing we want is to undermine the hard-won gains we’ve made since the dark days of the recession”, Williams told members of the Santa Cruz Chamber of Commerce.
“We should begin the process sooner so we can ensure that it is gradual and patient”.
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A pair of Federal Reserve policymakers backed near-term interest rate hikes, saying that such a move was “compelling” and deserved “serious consideration”, sending short-term Treasury yields soaring and doubling the odds of a March increase to 62% on Tuesday from just 31% on Monday.
