European markets look set to open slightly lower this morning after the Federal Reserve left interest rates on hold, and the Bank of Japan left its policy rate at -0.1%, though they did extend their stimulus package to include 0% loans of up to 300bn yen to earthquake affected areas.
They decided rather surprisingly not to extend their stimulus package to include negative rate bank loans, which would have seen the bank essentially paying banks to lend money. This failure to do so disappointed the markets as there had been widespread expectations that they would do so. This would have been an extension on policy that ran along similar lines to the decision by the ECB at its March meeting to mitigate some of the damage negative rates could potentially do to local bank’s overall profitability. As a result the yen rallied and the Nikkei dropped sharply.
Having unexpectedly reduced rates into negative territory of -0.1% in January, the Bank of Japan appears to have managed to undermine market confidence in its ability to manage the Japanese economy, as the yen unexpectedly appreciated in the aftermath of that particular decision, and it would appear that the legacy of that decision, which was passed by a narrow majority, continues to weigh on their decision making processes. Having only got a narrow majority to move into negative territory in January it would appear that Mr Kuroda was unable to persuade his fellow policymakers to take further steps so soon after the last decision.
The recent weakness in Japanese economic data, as well as the recent earthquakes has seen the Japanese economy struggle to gain traction.
A deluge of Japanese data also hit the wires, prior to this morning’s rate decision, including March CPI, which worsened even further to come in at -0.3%, though industrial production for March did improve coming in at 3.6% month on month. Large retail sales also disappointed slipping back from 2.2% in February to -1.2%.
Last nights Fed meeting didn’t contain too many surprises as the FOMC committee attempted to walk the fine line between appearing too dovish or too hawkish.
Ultimately, given some recent economic weakness they wanted to send the message to investors that a June rate rise remained on the table, as a policy option. In this they appear to have succeeded as they removed the reference to global economic and financial developments posing risks. They balanced this omission by noting that economic activity appears to have slowed.
The voting patterns remained the same with 1 dissenter, Esther George, the Kansas City Fed chief, who voted for an increase in rates by 25 basis points.
This cautious optimism had the dual effect of seeing the US dollar firm up a bit, and US stock markets pull back into positive territory, though the S&P500 continues to struggle at the 2,100 level.
On the subject of rate rise probabilities are concerned, the Fed statement did nothing to alter the maths with respect to a possible rate move in June with markets assigning a 19.2% probability of a rise, though rather interestingly the probabilities of a rate reduction have also started to flicker into life, rising to 3.2% from 1.6%.
The Federal Reserve’s caution is understandable given the recent slowdown in the US economy, evidence of which is likely to be forthcoming later today with the release of the latest Q1 GDP estimates.
US Q1 GDP is expected to more than halve from 1.4% to 0.6%, with personal consumption as well as manufacturing likely to account for the majority of the drop in economic activity. This slowdown is set against a backdrop of a continued improvement in the labour market, but nonetheless does pose questions about the state of the US economy. It is this uncertainty that appears to be causing divisions within the Fed’s ranks.
EURUSD – have managed to find some support at 1.1220 this week but we need to push back through 1.1350 to suggest a return towards 1.1440, otherwise we could well slip back towards the 1.1140 area, the lows at the end of March. A move through here could well see a move back towards the 1.1030 area, with support also towards 1.0800.
GBPUSD – this week’s break above the 100 day MA at 1.4450 as well as neckline resistance could well see further gains towards the 1.5000 level, but we need to push through 1.4650 first. Dips look set to remain well supported with only break below 1.4300 undermining the bullish scenario.
EURGBP – the weekly bearish engulfing pattern two weeks ago has seen the euro slide through the 0.7820 level closing back below the 200 week MA and targeting a potential further decline towards 0.7690 initially. Resistance now comes in at the 0.7820 level as well as 0.7860.
USDJPY – this week’s failure at 111.80 has seen the US dollar slip back but we need to break back below the 110.20 area to suggest that we’ve seen a near term top. Otherwise we could well extend towards 112.75 and potential 113.50.
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