nvestors had anticipated a dovish tone of communications from the Fed after policymakers suggested at their January meeting that interest rates could be held steady throughout the remainder of this year. The minutes themselves were very much in line with this sentiment, highlighting downside risks, namely Brexit and trade war fears. The minutes did, however, note ‘many participants observed that if uncertainty abated, the Committee would need to reassess the characterization of monetary policy as ‘patient’ and might then use different statement language’.

Some members of the committee stated that inflation would need to come in higher-than-expected in the coming months to warrant the need for additional hikes, although ‘several’ others were of the opinion that higher rates would be appropriate should the economy simply evolve as expected. It is not clear how many this ‘several’ refers to, although it does at least provide some comfort to US Dollar bulls that another rate hike could occur in late-2019.

We do, however, think that we would need to see a significant reduction in external downside risks and a sharp uptick in inflationary pressures for this to be the case. Our base case scenario remains for stable policy from the Fed throughout 2019.

Sterling rises on Chancellor Hammond Brexit comments

The Pound was able to notch some minor gains against its major peers this morning, supported by Brexit comments from Chancellor Philip Hammond.

Hammond spoke optimistically about Theresa May’s chances of forcing her EU withdrawal bill through the next parliament vote, set to take place before the end of the month. He stated that the possibility of a ‘no deal’ Brexit could encourage some MPs to shift course and support the Prime Minister’s deal.

Sterling had initially stumbled on Wednesday after reports that three Tory MPs would be joining the new Independent Group. The sell-off was, however, very minor given their views do not appear systemic within the Conservative Party. That being said, it does not bode well for May ahead of the next parliament vote, which she appears all but certain to once again lose.

Eurozone composite PMI beats expectations

There was some fairly encouraging news at last out of the Eurozone economy, with the flash composite PMI of business activity coming in above expectations for February.

The crucial index, one of the best up-to-date measures of economic activity in the bloc, rose to 51.4 from January’s 51.0. This uptick was driven entirely by a strong performance in the services sector, the index of which increased back up to its highest level in three months. On the flip side, manufacturing activity actually contracted this month, showing a rare divergence in performance between the two sectors.

While better than economists had anticipated, activity still remains at very low levels that suggest the Eurozone economy is barely growing. Currency traders gave the data little attention, with the common currency actually selling off following its release.

Figure 1: Eurozone Composite PMI (2015 – 2018)