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US Dollar falls as Federal Reserve keeps interest rates unchanged

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28 July 2016

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The Federal Reserve sprung no surprises last night, keeping interest rates unchanged for the fifth straight meeting and leaving the door open to a hike in either their September or December meetings.

he Fed sounded markedly optimistic, stating that risk to the US economic outlook had diminished, while acknowledging the strength of the labour and housing market. Significantly, every change from the previous meeting’s statement was in a positive direction and we think the central bank remains on course to hike rates at least once in 2016.

However, the US Dollar fell sharply last night, with investors instead choosing to focus on the lack of an explicit hint that rates could go up at the Fed’s September meeting.

Yesterday morning it was revealed that the UK economy picked up speed in the second quarter after GDP figures provided a pleasant upwards surprise. Britain’s economy grew 0.6% in the quarter and 2.2% on an annualised basis, slightly greater than anticipated thanks in part to a very impressive performance in the manufacturing sector (Figure 1).

Figure 1: UK Gross Domestic Product (2013 – 2016)

It is, however, worth noting that preliminary GDP figures are heavily prone to revision and we would not be surprised if we saw this estimate lowered once more data is made available. We think the Bank of England will be much more concerned with last week’s dismal PMI figures and still expect UK interest rates to be lowered by at least 25 basis points when the monetary policy committee meets next week.

We are also pencilling in around a 0.2-0.3% contraction in GDP in the third quarter once the effects of last month’s Brexit vote are fully taken into account and would not be surprised if the UK economy entered into recession this year for the first time in seven years.

Elsewhere, the Japanese Yen weakened again after Prime Minister Shinzo Abe announced a surprisingly large $265 billion fiscal stimulus package in order to kick-start the economy. This will likely add further pressure on the Bank of Japan to ramp up its own easing measures tomorrow.

Major currencies in detail:


Sterling rallied 0.9% following last night’s Fed statement.

Wednesday’s growth figures were completely overlooked by Sterling. The UK’s beleaguered manufacturing sector performed particularly well, growing 1.8% and expanding at a faster pace than the services industry for the first time since the beginning of 2014.

By contrast, a report from CBI on Wednesday afternoon was more negative, showing that retail sales in the UK had slumped by their most in four years in the first half of July. The CBI’s distributive trades survey fell to -14 from 4 in June.

There’s no major economic news out of the UK today. We instead look to Friday’s consumer confidence index from Gfk which is expected to fall to its lowest level since the beginning of 2014 following the Brexit vote.


The Euro appreciated 0.6% against the US Dollar following last night’s Fed announcement to its strongest position in almost two weeks.

Yesterday morning’s consumer confidence survey for Germany surprised to the upside, contrary to the very underwhelming ZEW sentiment indices released earlier in the month. The index fell less than expected to 10 from 10.1, with consumer spending in the country expected to firm in the coming months.

Today bodes to be a much busier day in the Eurozone. German inflation and unemployment data will give us a good indication as to the general health of Europe’s largest economy. The latest consumer confidence indexes this morning will also provide further evidence as to the extent of how much last month’s Brexit vote has dampened confidence, if at all, in the Eurozone.


The US Dollar index declined 0.4% after last night’s Fed announcement.

Earlier in the day durable goods orders took a turn for the worse, providing a rare blip in otherwise strong US economic data of late. Orders sank 4% in June, marking the largest decline since August 2014 and raising some serious concerns about the pace of business spending in the world’s largest economy.

Weekly jobless claims are expected to remain around a very solid 260,000 level, when released this afternoon. We also look ahead to Friday’s GDP figures, which are expected to show the US economy rebounded strongly in the second quarter following a rather disappointing start to the year.

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