Forex News
ABN AMRO strategists analyze the latest Federal Reserve decision to keep the federal funds rate at 3.5-3.75%. They highlight dissenting votes, Kevin Warsh’s emphasis on the 2% inflation target, and the Fed’s reliance on market signals. They expect rates to stay on hold in coming months but warn that high Oil prices could still trigger a September hike.
Fed holds but keeps hike risk
"The Fed decided to leave its target for the federal funds rate unchanged at 3.5-3.75%. This was in line with our own expectations and those of the vast majority of economists. However, few would have seen the hold as a done deal."
"The only take away, is that the FOMC remains more concerned about the inflation side of its dual mandate, rather than the full employment part. It noted that ‘job gains have kept pace with the workforce, and the unemployment rate has changed little’ but that ‘inflation remains elevated relative to the Committee's 2 percent goal’. Against this background, it stressed its commitment to ‘deliver price stability’."
"He [Warsh] stressed that the Fed did not have ‘a soft target’, it had a hard 2% target and the Fed would ‘not waiver’ in taking the right actions to achieve it. Part of this ‘hawkish’ communication might be designed to directly anchor inflation expectations, which the Fed Chair noted would partly also determine the inflation outlook."
"It seems that the FOMC is taking the market signal to be – at least on the basis of recent data – that policy rates should eventually go higher. At the same time, higher rates were doing the Fed’s tightening job for it, which could be interpreted as making actual hikes less necessary."
"Overall, the Fed clearly left the door for an interest rate hike in September wide open. However, a lot will depend on the data between now and then."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
Bank of England (BoE) Governor Andrew Bailey explains the decision to maintain the bank rate at 3.75% in a 6-3 vote split following the July monetary policy meeting and responds to questions from the press.
Key quotes
"UK market curve is entirely consistent with our reading of the economy."
"Should attach a lower than usual probability to BoE's central scenario."
"Situation in Gulf feels as uncertain as it did a few months ago."
"Encouraging that CPI is below where we thought it would be."
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
Bank of England (BoE) Governor Andrew Bailey explains the decision to maintain the bank rate at 3.75% in a 6-3 vote split following the July monetary policy meeting and responds to questions from the press.
Key takeaways
"Lack of evidence so far does not rule out future second round effects."
"Overall assessment of second round effects remains tentative."
"If Mideast conflict persists and we get second round effects, will likely need to raise rates."
"Current market pricing reflects risk premia rather than central expectations for bank rate."
"Rate curve seems in a reasonable position."
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
ING's Knightley and Turner highlight that a neutral‑hawkish Fed hold has slightly weakened the Dollar, reversing positioning that had shifted toward a rate hike. They argue EUR/USD is now likely to trade in a 1.14–1.15 range, with a more durable Dollar setback depending on sustained lower Oil prices and softer US jobs and inflation data that could undermine expectations for a September hike.
Dollar softens after close Fed call
"The FX market, perhaps more than any other class, had been shifting towards a hike today and keeping the dollar broadly bid. The decision itself has seen the dollar a little weaker, largely in line with what had been priced into the FX options market, and the dollar sold off a little more in the press conference."
"Today’s events will be a disappointment for those who felt Kevin Warsh could have flexed his hawkish muscles and left the FX market back to trading US data and what volatile oil prices mean for monetary policy."
"For FX, the reaction at the long-end of the bond market is partially reversing the narrative of a tough Fed assuaging concerns about the dollar de-basement trade. EUR/USD probably needs to trade more in a 1.14-15 range now, but a more sustainable rebound requires a sustained period of lower oil prices and US jobs and price data convincing the markets and the Fed that a September rate hike is no longer required."
"This is especially so given Warsh’s strong pitch today that the message from the markets has become more direct – and the current message is that the Fed will hike in September."
"Overall, today’s press conference can add to the sneaking suspicion that the Fed will talk tough but won’t hike and the market conviction over a September rate hike may well come under pressure."
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
Bank of England (BoE) Governor Andrew Bailey explains the decision to maintain the bank rate at 3.75% in a 6-3 vote split following the July monetary policy meeting and responds to questions from the press.
Key takeaways
"UK economic activity subdued, labour market soft."
"No evidence of 2nd round effects but cannot draw too much comfort from this."
"We stand ready to adjust our stance as evidence evolves."
"Expect indirect inflation effects to add 0.5 percentage points to inflation in H2-2026."
"While household inflation expectations have fallen they remain elevated."
"Weak demand is limiting pass-through of higher costs to prices."
"Spare capacity in job market likely to reduce workers' capacity to get pay rises."
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
- Annual CPI inflation in Germany rose to 2.8% in July's flash print.
- EUR/USD clings to modest daily gains above 1.1470.
Annual inflation in Germany, as measured by the change in the Consumer Price Index (CPI), climbed to 2.8% in July's flash estimate from 2.3% in June. This print came in above the market expectation of 2.7%. On a monthly basis, the CPI rose 0.8%, following the 0.3% decrease recorded in June.
The Harmonized Index of Consumer Prices, the European Central Bank's (ECB) preferred gauge of inflation, increased 0.9% on a monthly basis and rose 2.8% on a yearly basis.
Market reaction
EUR/USD showed no immediate reaction to these figures and was last seen trading marginally higher on the day at 1.1478.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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