Markets expect US rate rise to be next year | Inflation is key – German and UK rates are out today

According to www.dailyfx.com, the market (see above) is now pricing in the FOMC meeting in March 2016 as the best chance for the US Federal Reserve to begin the much anticipated process of getting back to normality in terms of interest rates this year. One has to wonder what ‘normality’ means in this context, as rates in the US have been falling or flat for over ten years now.

The March 2016 meeting has one thing going for it being the month for the first rate rise – it is scheduled to be followed by a press conference (and perceived wisdom is that a rate rise must be accompanied by such, although Janet Yellen has dealt with that by saying they could arrange an unscheduled meeting with journalists at any time).

It is becoming apparent, from the IMF Annual meeting that has just finished up in Peru, that the greatest threat to emerging markets from the actions of the US Federal Reserve is not the fact that it is about to raise rates, but rather the uncertainty that is now attending that process. Interest rate rises in the US will tend to result in cash being withdrawn from the emerging markets, which could cause problems for the value of their currencies and the wellbeing of their economies.

Inflation is key – German and UK rates are out today

From the point of view of the rise or fall of the EURUSD, which is what most concerns us, the behaviour of inflation on both sides of the Atlantic is the most important factor, as its rise or fall is a considerable determinant of whether the Fed will raise rates sooner rather than later and / or that the ECB will accelerate its easing programme, by providing more Quantitative Easing. We will know a little more about that later today when inflation figures for Germany and the UK are released.