Lael Brainard Speech Pours Cold Water on September 2016 Fed Rate Rise

Brainard to move foreign exchange markets today

The US Dollar weakened after the US Fed's Lael Brainard warns against raising interest rates in haste.

A September interest rate rise at the US Federal Reserve was effectively put on hold by a key voting member of the US Federal Reserve's Open Markets Committee just days ahead of the policy meeting scheduled for 20-21 September.

Brainard delivered a previously unannounced speech at The Chicago Council on Global Affairs at 12PM Central Time, 6PM B.S.T.

Committee members must be silent during the preceding week, making no comment after Monday.

In her speech Brainard warned against removing support for the US economy by raising interest rates too soon and that the case for a preemptive raising of interest rates was now "less compelling" in an environment where falling unemployment had been slow to boost inflation.

"Asymmetry in risk management in today’s new normal counsels prudence in the removal of policy accommodation," Brainard said, arguing that with interest rates near zero, it’s easier for the Fed to react to faster-than-expected demand than to a negative surprise that upsets the economy.

"I believe this approach has served us well in recent months."

Chances for a September rate rise have fallen back, and the US Dollar alongside.

"Between Fed voters Brainard and Tarullo's recent comments we don't believe there's enough consensus for a rate hike next week and for this reason we expect the dollar to slip further in the coming days," says Kathy Lien, Director at BK Asset Management.

We note that stock market futures have risen and commodity prices have pared their losses.

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Markets Endure Panic-Attack Over Prospect of a September Hike

Friday 9th September saw the US Dollar rise while stock markets, commodity prices and commodity-linked currencies fell notably lower as the prospect of a September rate rise was raised by another Fed member.

“This market correction was triggered by rising expectations that the Fed wants to raise rates again, colliding with long positions in both risk assets and in Treasuries. Friday's market volatility boosted the US dollar by a little less than 1% on a broad trade-weighted basis, not a big move compared to the moves in bonds equities and in emerging markets,” says Kit Juckes at Societe Generale, writing to clients from London.

A US rate rise would push up the cost of borrowing not just in the US buy across the world and markets are concerned such moves will knock a few points off economic growth.

Triggering the latest Fed-fright was a speech delivered by Eric Rosengren, President and Chief Executive Officer of the Federal Reserve Bank of Boston to the South Shore Chamber of Commerce in Quincy, MA.

Rosengren, traditionally shy on advocating for higher rates, raised eyebrows by saying he now backs an interest rate hike noting the risks for an overheating market were now growing.

The odds of a September rate hike increased from 22% to 30%. Chances of a December move went from 51% to 60%.

Watch Rosengren’s speech in full:

GBP/USD Must Break these Levels if it is to Turn Bullish

A lot of good news appears to now be discounted by Sterling's valuation; this is why it appears to have fallen prey to a bout of profit-taking over recent days.

For the technical picture of the Sterling-Euro rate to improve, Piet Lammens at KBC Markets tells us the GBP to EUR exchange rate needs to break above 1.1984/1.20 and even 1.2120.

"This looks difficult short-term. A countermove is developing," says Lammens.

GBP/USD also saw a positive momentum develop and a first resistance at 1.3372 was temporary regained.

"1.3481/1.35 is key before concluding the bottoming out process after the steep post-Brexit fall is finished. We expect Sterling’s consolidation/correction on the August rally to continue," says Lammens.

JPMorgan Upgrade GBP Forecasts

Elsewhere, we learn today that analysts at JPMorgan, the world's largest investment bank, have upgraded their GBP forecast profile.

Analysts do caution however that this is essentially a re-profiling to show a less abrupt downtrend without changing the end point very much.

The forecasts for the rest of the year are raised by 3.5% - the year-end target for cable is raised from 1.28 to 1.32 and the target for EUR/GBP is cut from 0.90 to 0.87.

The rolling 1Y forecasts are little changed for EUR/GBP - 0.90 versus 0.91 previously - and marginally higher for cable (1.33 from 1.30) to reflect the extended uptrend in EUR/USD to 1.20 in 3Q17.


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