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Fed holds as expected, ECB in focus

Last night the Federal Reserve unanimously voted to keep rates unchanged, which was pretty much as expected. More importantly they gave no indication of when further rate cuts might come with no Fed officials indicating any sort of move on rates, up or down, at all for next year.

As suspected last Friday’s bumper payrolls report appears to have reinforced US policymaker’s confidence in the labour market as well as the US economy. Rather perversely the changes in the statement actually caused the US dollar to fall, despite the prospect of no changes next year.

What did change was that Fed officials nudged their inflation expectations downwards for next year, as well shifting downwards the rate dot path expectations for both 2020, 2021 and 2022, and it is this it would appear that prompted the US dollar to weaken, and bond yields to slip back.

Fed chair Jay Powell also indicated that for any rate hikes to happen in the future, inflation would need to be far more persistent before Fed officials would consider further rate hikes.

This neat balancing act helped stock markets in the US break their two-day losing streak with the S&P500 almost wiping out the declines of the last two days, despite ongoing concerns about the prospects of a US, China phase one trade deal by the end of the week.

Despite the strong finish in the US, markets here in Europe appear slightly less enthusiastic, opening modestly higher with all eyes set on today’s European Central Bank rate meeting and more importantly Christine Lagarde’s first press conference as ECB President.

Mario Draghi will be a tough act to follow and for all of Lagarde’s skills as a lawyer and her experience at the IMF, she is no central banker. This is likely to be a big skills gap for her which means she will need to lean heavily on the colleagues around her. While Draghi could explain the inner workings of a TLTRO, tiering and monetary policy it is unlikely that this is something the new ECB President could do, which means any questions on detailed policy are likely to be directed at whoever is sitting on her right.

Voting begins this morning in the UK General Election with the pound continuing to hold up well, and with campaigning now over the next move in sterling is likely to come with the release of the first exit poll just after 2200GMT, when markets will get the first indication of their preferable outcome, which already appears to be partly priced in, or other more unwelcome scenarios.

While the polls have consistently given the Conservatives a decent lead over the past few weeks, some of the gaffes this week from both sides could well have shifted the voting calculus, particularly when voting intentions as far as party lines are concerned have never been less clear.

The toxicity of the respective candidates towards certain parts of the electorate has meant that for a lot of voters there will be a lot of nose holding going on today, when they ponder their choices in the privacy of the polling booth.

EURUSD –looks set to test the 200-day MA as well as trend line resistance from the 2018 highs at the 1.1170 level. A move through 1.1180 targets a retest of the 1.1250 area.

GBPUSD – 1.3200 target hit with the prospect of further gains towards the 1.3500 area in the coming days. We still have solid support at the 1.3020 area, which if broken has the potential to retarget a move back to the 1.2760 area.

EURGBP – while below the 0.8470 area the risk is for further losses towards the 0.8350 area. We could still see a short squeeze back to the 0.8570 area, but the bias continues to shift to further losses in the coming weeks.

USDJPY – currently range trading between the 108.40 area and the 109.20 area. A break either side is needed to target the next move, be it towards 107.60 or the 110.00 area.

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