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Fed in focus as yields rise

Markets in Europe managed to post a more positive session after a slightly indifferent session on Monday, with the FTSE100 in particular outperforming due to the continued rise in the oil price to new four-year peaks. Financials also had a fairly decent day on the back of rising yields.

US markets also started the day on the front foot, however these gains soon evaporated as US President Trump hit his stride in a speech to the United Nations General Assembly, where he made it quite clear that the US “would no longer tolerate abuse” when it comes to trade practices.

He aimed a lot of his criticisms in particular at China and Iran, the former for alleged theft of intellectual property as well as currency manipulation, and the latter for sowing chaos, death and destruction. OPEC didn’t escape his criticisms either, reiterating his desire for them to generate more output to compensate for the loss of Iranian oil production, due to the reimposition of sanctions.

The strident tone of his speech served to temper any further upside ambitions for US stocks, ahead of today’s Federal Reserve rate meeting.

With a rate rise today more or less a done deal, attention will be less on the fact that this will be the third rate rise this year, than on how the Fed sees the glide path for further policy actions.

Yesterday’s September consumer confidence numbers showed that the US economy continues to race ahead after posting another 18-year high. With weekly jobless claims at their lowest levels since November 1969, the focus today will not only be on the statement and the dot plots, where we may get some clues as to where new vice chair Richard Clarida stands, but also on Jay Powell’s press conference.

A rate rise today would be the eighth one since December 2015, taking the upper boundary of the headline rate to 2.25%. The only G7 central bank that has come anywhere close to this level of tightening of monetary policy has been Canada which has seen 4 rate rises over the same period.

Despite these rate rises, US and Canadian markets have managed to remain close to recent record highs, despite concerns over a break down in the NAFTA trade deal and the start of a fresh round of tariffs this week in the current trade stand-off between the US and China.

In this context today’s Federal Reserve meeting will be important in the context of the projections for future inflation and GDP forecasts, but also future expectations of how many more increases in the Fed funds rate we can expect to see between now and the end of next year.

If the FOMC is particularly aggressive in terms of its rate outlook, and in terms of its assessment of the health of the US economy, then we could well see further US dollar strength in emerging market currencies. Recent comments from Fed governor Lael Brainard, normally a fairly dovish voice on the FOMC, would appear to suggest the Fed is more worried about inflation and the economy running too hot than the risks of a trade war.

A more hawkish turn could be the added push 10-year yields need to push above the 3.12% peaks we saw earlier this year, in turn heaping further pressure on emerging market debt costs.

If on the other hand they are more cautious and signal it may be time for a pause then the US dollar could come under additional pressure, given recent weakness.

The pound has continued its recent recovery after the sell-off at the end of last week. Concerns that we might see another election appear to have disappeared for the time being, after Prime Minister May pushed back hard on the idea when questioned about it on her way to the UN in New York. With party conference season in full swing the pound will continue to be susceptible to the political slings and arrows of political hyperbole, especially since the Conservative party conference starts soon after this week’s Labour conference finishes.  

EURUSD – currently holding below the 1.1840 area and June highs. If we break through these levels we could well see a retest of the 200-day MA at 1.1980. A move back below 1.1690 opens up the prospect of a move back towards 1.1620.

GBPUSD – continues to rebound after the heavy falls at the end of last week, but we really need to see a move back through 1.3220 to argue for a return to the 1.3300 area. The larger support remains back towards the 1.3000 level with the 50-day MA at 1.2990. Only a move back below 1.2980 undermines the rally off the August lows at 1.2660, and argues for a retest of these levels.

EURGBP – continues to drift lower after last week’s short squeeze, and could head back to the 0.8840/50 area if we break below the 0.8920 area. The 0.9040 remains a key level which while it caps keeps the upside limited.

USDJPY – while the 113.20 level caps we could see a drift back to the 112.00 area. A move below 111.80 opens up a return to the 111.20 area where we the main cloud support area.

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