Hawkish move from the Fed

The Federal Reserve raised their discount rate by 0.25% overnight.  The Federal Reserve Discount Rate is the emergency lending rate at which US commercial banks are able to borrow funds from one of the Federal Reserve Banks around the country. Given that there is currently no ‘emergency’ and that short date rates will remain linked to the Fed Funds Target Rate, which remains at 0.25 – Zero %, then banks will continue to use the money markets. What the move does do however, is confirm that discussions are taking place amongst members of the FOMC concerning the likely exit strategy, and probably more important the timetable, in order to normalise the current situation. The feeling is still strong that an official tightening of monetary policy won’t occur until the autumn at earliest but the raising of the Discount Rate was enough to provoke a further strong run for the Dollar.

Officials across the Far East were quick to reassure the markets that the hike would not adversely affect their respective economies, several in fact claiming that the move was in fact a positive for growth. Currency traders would have none of it however and whether it was on reduced risk appetite, on expectation of better yields on Dollar holdings or just a continuation of the anti-Euro sentiment, the Dollar has maintained its positive bent, touching a 9-month high against the poor old euro. Data out from the US today is down to just CPI, which, as with other G7 nations this month, is expected to show a rise in the inflation rate from previous months.

Sterling wasn’t immune to the Dollar’s rise either and in fact, suffered above and beyond owing to the very poor Government borrowing figures. The UK press is full of ‘doom and gloom’ and the currency was reacted poorly on the back of sharply higher Sterling bond yields and comparisons between the UK and Greece. we are currently at very important support levels against both Dollar and Euro and the slightest push in the wrong direction could easily see us looking at 1.50 and 1.10. Retail sales was weaker than expected further undermining the pound.