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FX markets eye key Federal Reserve, ECB announcements next week

The EUR/USD rate continued to edge higher on Thursday, although lost ground again this morning, with investors in a cautious mood ahead of a number of key announcements in the currency markets next week.

First up will be the Federal Reserve meeting on Wednesday, with the FOMC expected to announce its second rate hike of the year, and seventh since the current tightening cycle began. We think that a hike at this month’s meeting is more-or-less a nailed on certainty. As is generally the case when market pricing is so elevated going into a meeting, the main focus among currency traders will instead be on the Fed’s communications regarding future policy, namely whether we should expect to see a total of three or four rates increase in 2018. All eyes on Thursday will then be on the European Central Bank meeting, with the market anticipating the possibility of an announcement on the timing of the Governing Council’s next policy move. The ECB announced back in October that it would be extending its quantitative easing programme until September this year at a reduced pace of 30 EUR a month. However, with inflation rising sharply in May, there has been speculation that policymakers may next week begin discussions on ending the programme at some point later in the year. The updated GDP figures for the first quarter were left unrevised yesterday, with growth in the Euro-area economy confirmed at 0.4% quarter-on-quarter. Next up for the Euro will be the ZEW economic sentiment survey (Tuesday), ahead of the ECB meeting on Thursday.

Volatile session for Sterling, Turkish Lira jumps after rate hike.

The Pound suffered from another particularly volatile day of currency trading yesterday, although ended up more-or-less where it began the day at London close. Investors remain wary of downside risks from the Brexit negotiations, although renewed optimism has returned regarding the UK economy following the upbeat services PMI released earlier in the week. With no economic data releases out of the UK at all today, Sterling traders will instead look ahead to Tuesday’s labour report. We therefore expect the Pound to remain mostly range bound during London trading today. In a fairly quiet session of trading in terms of news, the main story was perhaps over in Turkey. The Turkish Lira jumped by around 2% against the US Dollar after the country’s central bank followed up its recent surprise rate hike with another 125 basis point increase. The Lira has been hammered in recent weeks, although the central bank has gone against recent calls from President Erdogan, who has claimed interest rates were ‘the mother and father of all evils’.



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