If the Bank of Japan’s intention yesterday was to weaken the yen and help out the banks then their policy tweak can either be viewed as a part failure, or a part success, but in a double blow to their ambitions to weaken their currency the US Federal Reserve decided to do what it has done for the last nine months, absolutely nothing, sending the US dollar sharply down across the board, and the yen sharply higher.
As expected the US Federal Reserve’s decision to leave rates unchanged between 0.25%-0.50%, was not an entirely unexpected development, given some of the heavy briefings in the weeks leading up to and after Jackson Hole, with three members dissenting in favour of an immediate increase of 25 basis points, namely Mester, George, and Boston Fed chief Rosengren, who has traditionally been one of the more dovish members.
There had been an expectation that whichever way the Fed went on the decision that it wouldn’t be unanimous, but it would appear for now that the dovish camp has won out on this occasion, however a December rise remains very much on the table, in an almost identical replay of last year, when the Fed also baulked in September only to subsequently act in December.
While there is another meeting in November, the Fed is unlikely to act then simply because the meeting concludes 6 days before the upcoming Presidential election, which already currently appears to be weighing on consumer sentiment particularly given how unappealing both candidates are.
This election is likely to remain the rather large elephant in the room which in the unexpected event of a Trump win, would in all likelihood scupper any prospect of a move in December as well.
It was noteworthy that a new line was added to the statement “the Committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives”. This paragraph appears to have been added to buy time as Fed policymakers try to make sense of the apparent disconnect between a resilient jobs market and a slowing economy.
While the increase in dissent from one to three was not unexpected, the upbeat tone, along with Janet Yellen’s positive appraisal of the US economy don’t exactly chime with the latest projections for GDP and inflation which were both guided lower. The Fed’s 2016 GDP forecast was guided down to 1.8% from 2% while the latest inflation forecast was nudged down to 1.3%. This doesn’t exactly chime with a central bank in a rush to hike rates.
Even so the goldilocks outcome from last night saw US stocks rise, with the Nasdaq hitting a new all-time high, while the US dollar fell back, and this looks set to translate into a positive start for European markets this morning.
Now that we’ve been able to put the last of the major central bank meetings behind us we have learnt some interesting lessons.
Yesterday’s action by the Bank of Japan is more or less an admission that they erred in cutting rates earlier this year, and that yesterday’s actions to manipulate the yield curve upwards were an attempt to address that and ease the pressure on the banking sector.
The rally in financial and banking stocks would appear to suggest that this could be a template for the European Central Bank in trying to address margin compression problems for banks profitability, and that also the ECB is going to find it very difficult to do much more than it already has done and is expected to do much beyond the end of its current QE program.
Finally we’ve learnt that the Federal Reserve is more divided than ever and that policymakers don’t appear to have a clue what is happening in the US economy, however the prospect of a rate rise by year end has become much more likely, which in the short term should be good for financials.
Also worth keeping an eye out for today are speeches by ECB President Mario Draghi, Bank of England governor Mark Carney and external MPC member Kristin Forbes.
EURUSD – still supported by support at the 200 day MA, as well as the key support area near the 1.1120 area for now. A move back through the 1.1220 area retargets the 1.1300 area while a move below 1.1120 retargets the low 1.1000’s.
GBPUSD – the pound has continued to drift lower, but is currently holding above trend line support from the July lows, which currently comes in at 1.2930. A break lower has the potential to target the 1.2800 level. We need a rebound through the 1.3120 level to stabilise.
EURGBP – the resistance at the 0.8620/30 area has contained the current rebound for now, which keeps the prospect of a move back to the 0.8480 area on the table. Above 0.8640 retargets the 0.8720 area.
USDJPY – having failed at 102.50 yesterday the US dollar has continued to slide lower and looks set for a move towards the recent lows around the 99.50 area. While below the 103.00 area the prospect of a move through 99.50 towards 96.00 remains.
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