Inching towards a Fed tightening

July 30, 2015

The impression given by the Fed’s post meeting statement last night suggests a central bank inching towards a rate increase, with inching being the operative word here because the changes to the wording were indeed very subtle. But there will be an even greater focus on the jobs numbers going forward, given that the Fed has stated that it will be appropriate to raise rates “when it has seen some further improvement in the labour market and it reasonably confident that inflation will move back to its 2% objective”. So the data dependency has been given even more emphasis and conditionality. The dollar has strengthened on the back of the statement changes, with EURUSD briefly below the 1.0950 level during early European trade. Interesting to see EURJPY also lower, down to the 136.00 level.

The price action for today and tomorrow likely to be influenced by month end flows, which could make for some more choppy trading than usual. The further gains in stocks provides a comfort blanket around this, especially in light of the stabilization seen in the China index of late. Cable continues to act as the more interesting rate story play, as expectations and chatter regarding a BoE hike continues to surface, but a move this year still looks a long shot and the FX side looks to have run slightly ahead of the rate story, making cable potentially more vulnerable into month end.

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