Dollar gains stick as Fed minutes point to further rate hikes

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The U.S. dollar held on to gains as minutes of the Federal Reserve’s September meeting underlined expectations for the central bank to continue on its path of gradual rate increases.

The majority of the Fed’s Open Market Committee believe that rates will have to rise until the economy slows down on the back of rising borrowing costs, according to the minutes. Investors have been speculating about when the rising rate cycle would come to an end, with many expecting hikes in 2019 but fewer beyond then.

Read: Federal Reserve minutes indicate interest rates will have to rise high enough to slow down the economy

The September meeting saw the Fed drop the word “accommodative” from the description of its monetary policy, but the minutes showed few participants expected that policy would have to instead become restrictive.

“The median rate projection was 3.4%. Accordingly it is clear that the majority of officials think the fed-funds rate will need to rise [above] its long-run neutral level to prevent inflation climbing further above the 2% target,” wrote Paul Ashworth, chief U.S. economist in a note.

The minutes follow the late-September meeting at which the central bank increased interest rates for an eighth time since late 2015, and the third time this year. A fourth rate hike is expected in December. CME Fed funds futures currently put the probability of a December hike at 81.4%, up from 78.5% on Tuesday.

The dollar, measured by the popular ICE U.S. Dollar Index














DXY, +0.59%












was among the best performers of the session and extended its gains to be up 0.6% at 95.570, counteracting Tuesday’s sluggishness. The index tracks the dollar against a basket of six major rivals.

Besides the Fed minutes, the Treasury’s report on foreign exchange practices in which the U.S. could, but is unlikely to, label China a currency manipulator is also looming.

Don’t miss: Here’s why investors shouldn’t take their eyes off China’s yuan

Meanwhile in Brussels, a highly anticipated European Union summit was under way. As EU leaders arrived, the mood was mixed, with EU chief negotiator Michel Barnier telling reporters “we are not there yet” and German Chancellor Angela Merkel saying the work was 90% done.

Read: What is Brexit and why is it proving so complicated?

The EU is prepared to give the U.K. an additional third transition year to negotiate a trade agreement to move the negotiations along. Market participants are watching for whether the talks can clear the way for an expected November meeting to complete a deal ahead of the U.K.’s departure from the bloc in March.

The British pound














GBPUSD, -0.1220%












 last bought $1.3119, down from $1.3185 late Tuesday. This weakness was in part due to lower than expected consumer price data earlier in the day. Also, Jon Cunliffe, a deputy governor at the Bank of England, told a parliamentary committee that the pound could fall significantly if the U.K. leaves the EU without a new trade deal in place, news reports said.

Read: With ‘no-deal’ Brexit risk on the rise, analysts see uncertain path for pound

In European data, harmonized inflation in the eurozone was unchanged at 2.1% for the year leading up to September, while U.K. harmonized consumer prices undershot expectations at 2.4% versus 2.6% expected.

The cooler British reading was “dampening any need for Bank of England action in the immediate future,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management.

Anticipated interest rate increases in 2019 have been lending some support to analyst’s medium term view on the Brexit-battered British pound.

Elsewhere, the Italian budget remains on investors’ minds. The country’s 2019 budget proposal which foresees a higher budget deficit, will likely run up against some problems in Brussels. Italian undersecretary of the regions Stefano Buffagni said the country, which is the eurozone’s third largest economy, had to prepare for a possible downgrade of its credit rating. Investors are worrying about the financial state of Italy, as the country is considered too large to be bailed out in the way Greece was.

The euro














EURUSD, -0.0174%












 last fetched $1.1505 from $1.1577 Tuesday.

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Source : MTV