Christmas is coming and the Federal Reserve, European Central Bank and Bank of England are not in the mood to change policy direction until the New Year.


The US dollar and Treasury yields slid after the Fed’s fairly dovish hike on Wednesday. There was precious little in the language that was overtly hawkish or signalled that the central bank will tighten any more quickly than the market already expects.

Dots were broadly unchanged, with the median fed funds rate still seen at 1.4% in 2017, 2.1% in 2018 and 2.7% in 2019. The 2020 projection was raised to 3.1% from the previous 2.9%. But the Fed’s forecasts on anything more than one year out have traditionally proved way off the mark, read into that what you will.

On inflation there was no shift whatsoever, save for a marginal 0.1 percentage point increase to this year’s level of headline inflation. Core PCE remains unchanged. The fall in the unemployment rate projections signals more tightness in the labour market, but still this does not seem to be feeding through to wages and inflation. A structural problem but the Fed retained its view that the lack of inflation is transitory. Markets don’t buy it and OIS and fed fund futures interest rate expectations are somewhat flatter than that implied by the dot plot. A slacking in the core CPI level earlier in the day was the catalyst for the fall in 10-year yields and the Fed failed to do anything to help.

Yield curve flattening continues. The spread between the 10-yr and 2-yr yield is now just 57 basis points. The curve flattens almost completely from 7-yr to 10-yr, with the former’s yield now hitting 2.280%, against 2.371% for the latter. At the current rate we’re looking at inversion sometime next year, but there is cause for optimism that the 10-yr yield can climb as tax reform gets passed. Yellen reckons it will boost the economy, but was cautious on saying to what degree. Fiscal stimulus will almost certainly have to be factored into policy come the New Year and this gives reason to be a tad more bullish on USD for 2018, while it also seems likely that given the upturn in growth and the tightening labour market, there is reason to think the Fed will stick more closely to its dot plot than the market currently expects.

USD slackened post-announcement. USDJPY slipped but rallied off firm support at 112.50 and has a chance to rally to 113.00 ahead of US retail sales data at 13:30 (GMT). EURUSD regained the 118 handle but upside looks limited ahead of the ECB meeting as it seems highly unlikely it can offer anything hawkish for euro bulls.


All indicators point to a bland European Central Bank meeting with all three rates to be unchanged – it’s going to be 2019 before rates rise.  The ECB plans to cut its asset purchase programme in half from January, buying €30bn of bonds a month until September, although we know it will continue to buy assets after that date.

Following the decision in October it seems likely the governing council will put off any serious discussions around QE, such as whether there should be a firm stop date or not, until the New Year. Growth is strong, inflation continues to undershoot and the October meeting set the agenda for nothing to change in policy terms for at least several months, although discussions about QE will surface in the early part of 2018.

Focus is on the forward guidance – will it continue to say rates will only rise well after the end of QE? It seems almost certain it will – there is little chance the ECB will rock the boat at this meeting, having done a pretty tidy job of guiding the markets to expect the taper last time.

Inflation forecasts for 2020 make the staff projections for the first time so this will be of interest for traders. Core inflation remains slow, hitting just 0.9% in November according to the flash estimate. Headline inflation continues to creep northwards, having hit 1.5% in November from 1.4% the previous month. The jump in crude prices will be an important factor in the near-term projections.

The result will probably be an upwards revision to the 2018 headline inflation outlook but it’s hard to see anything especially positive for 2020 given the lacklustre level of core inflation. There could be a downward revision to this year’s core inflation projection.

If anything today’s meeting could further push back expectations for rates to rise, which could easily push EURUSD back to the $1.17 handle.

Bank of England

Following the increase in the main CPI rate to 3.1%, the Bank of England meeting gives us a chance to see whether policymakers have anything more to say on inflation. But this looks like the peak of inflation - it will only get really interesting it if persists at the 3% level for longer than planned.

However there is no chance the MPC will vote to change monetary policy at this stage. There also seems little chance that the Bank will signal it is ready to tighten interest rates any more quickly than the current path implied by the latest inflation report.

Dollar weakness lifted GBPUSD back to the $1.34 handle, although it can expect resistance at $1.3450.


or LOGIN as existing customer

Any information, analysis, opinion, commentary or research-based material on this page is for information purposes only and is not, in any circumstances, intended to be an offer of, or solicitation for, a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. Any person acting on it does so entirely at their own risk and ETX Capital accepts no responsibility for any adverse trading decisions. You should seek independent advice if you do not understand the associated risks.