Today’s Fed meeting seems like it has been the one that has been the longest time coming. A couple of months ago, there was almost a universal thinking that we would see rates increased at the meeting. Then came the wobbles that emanated from China, together with the lower oil price. We’ve see inflation data over that time generally fall to the soft side of expectations and market based measures of inflation expectations fall to levels last seen in the early part of this year. So for the first time in a long time, this is the first meeting where investors are really going to be staring at the rate on the screen to see if it does change. Surveys of bank economists are pretty evenly split on the outcome, whilst interest rate futures are suggesting a 33% probability of a change in rates. Whilst on balance a rate increase would be dollar positive, it is the statement that will determine the sustainability of this, together with the trajectory of forecasts published by the Fed today. Even on a no change outcome, we’re going to see volatility, both on the statement and the subsequent news conference given by Yellen.
Before the Fed decision arrives we have retail sales data in the UK, together with housing starts in the US and the usual weekly claims data. Looking across FX, the biggest standout is the recovery in emerging market currencies, where over the past week we’ve seen the Russian Rouble up nearly 4%, and the South African rand up 2%. The Aussie has also managed a decent recovery, up for the past seven sessions and to levels last seen vs. the USD since late August. On balance, we see the Fed on hold. Initially this is likely to give emerging market currencies a further boost, but if Yellen proves to be hawkish, then this move could prove to be transitory.