Fed signals more interest rate hikes, UK Parliament backs Brexit bill

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2 February 2017


The Federal Reserve last night kept its benchmark interest rate unchanged, as was almost universally expected.

he Fed struck a fairly upbeat tone on its assessment of the US economy, claiming the jobs market and measures of consumer and business sentiment had all improved of late. Policymakers kept the door open to multiple interest rate hikes in the US this year and we think they still remain on course to raise rates at least three times in 2017. However, the Dollar slipped up during Asian trading after the Fed failed to provide any explicit hint as to when rates would next be raised.

After London trading ended, the UK Parliament also voted comfortably in favour of backing the Government’s EU bill by 498 votes to 114, paving the way for Theresa May to begin Brexit talks by her March deadline. The bill will now face additional scrutiny in the Commons and the House of Lords before it can become law.

Earlier on Wednesday, a solid set of economic news out of the US helped the Dollar recover somewhat after suffering from its worst January performance since the financial crisis. Yesterday’s ADP employment number, which measures job creation in the private sector of the US economy, came in well above expectations. Private employers added 246,000 jobs in January (Figure 1), comfortably above the 165,000 forecast.

Figure 1: US Private Sector Employment Change (2010 – 2017)

The Bank of England will take centre stage this afternoon with its first “Super Thursday” of the year. The central bank will be announcing its interest rate decision and Quarterly Inflation Report at midday, followed by Governor Mark Carney’s press conference at 12:30 UK time.

We expect the Bank to keep its policy unchanged, in line with the overwhelming majority of the market. Growth and inflation forecasts are likely to be raised following the sharp decline in Sterling, although this has largely been priced in. Mark Carney is also likely to stress that interest rates are just as likely to be raised as lowered this year.

Major currencies in detail


Sterling rose 0.8% against the US Dollar yesterday after the release of a solid manufacturing survey.

Activity in Britain’s manufacturing sector came in right in line with expectations on Wednesday. The PMI from Markit dipped slightly as expected to 55.9 from 56.1, although remains just shy of its highest level since early-2014. New orders accelerated at their fastest pace in two-and-a-half years, with demand no doubt helped by the relative weakness of the Pound which remains around 15% lower than its pre-referendum peak.

The construction PMI is expected to post a modest decline this morning. The Bank of England will, however, steal the limelight today.


The Euro lost some of its gains from earlier in the week after the release of the impressive economic news out of the US.

The single currency was little changed following the release of the latest manufacturing PMI out of the Euro-area. A slump in manufacturing activity in Italy and Germany was made up by an impressive performance in both Spain and France. The overall index increased to 55.2 from 55.1 for January, boding well for Eurozone growth as a whole in the first quarter of 2017.

President of the European Central Bank Mario Draghi will be making an appearance marking the 10th anniversary of the adoption of the Euro in Slovenia today, although any comments regarding monetary policy are unlikely.


The US Dollar rose 0.1% yesterday, despite dipping slightly off the back of a slightly less hawkish than hoped Fed statement.

The latest manufacturing PMI from ISM provided a lift for the greenback yesterday afternoon. The index rose above expectations to 56.0 from 54.7 with the industry expanding for the fifth straight month and appearing to pick up steam at the beginning of the year.

News out of the US will be limited today with investors turning their attention to Friday’s nonfarm payrolls report. We think yesterday ADP report bodes particularly well for tomorrow’s more crucial nonfarm payrolls figure, the most significant single economic data release on the economic calendar. Consensus points towards a reading of around 175,000, which would likely provide decent support for the Dollar this week.