Over the past few weeks global central banks have adopted a much more transparent easing bias against a backdrop of a slowing global economy. What is quite apparent from the data so far is that the slowdown is much more manufacturing based than services based, where economic activity hasn’t been anywhere near as subdued.
The recent decline in oil prices, also has the capacity to deliver a bit of a boost, as well as pressing down on some of the recent rise in inflationary pressure. Overnight the Bank of Japan maintained the status quo by leaving policy unchanged by a majority of 7 to 2.
The main story happened last night with the latest FOMC rate decision, with the markets front running a possible move towards an aggressive easing bias. This still seems a rather optimistic view point given that the Fed is still running down the size of its balance sheet, a process which is not due to finish until September.
Last night’s decision and subsequent statement and press conference, offered more questions than answers when it came to when and how the Fed was likely to move next.
Not surprisingly rates were left unchanged, however there was a dissenting view in the form of St. Louis Fed President James Bullard who called for a 25bps cut in the Fed funds rate. In terms of the outlook for the economy, the Fed kept its growth forecast unchanged, but did downgrade its inflation forecast, from 1.8% to 1.5% while the dot plots for this year showed no change to the rate path.
The statement was also a lot more dovish in its outlook, the FOMC citing “uncertainties about the outlook” increasing. Against that backdrop the committee said they would closely monitor the implications of incoming information and act as appropriate to sustain the expansion, in light of muted inflation pressures.
The committee was also evenly split with eight seeing no change to policy this year, and eight expecting to see a rate reduction, with the one remaining member forecasting a rate rise.
It remains to be seen whether, as markets expect, we do get a rate cut in July, however the odds of a move appear to have increased in light of last night’s events. The reasoning behind such a move still remains a puzzle, given that the Fed will still be winding down the size of its balance sheet. Bond yields continued to move lower in the wake of the statement, as investors moved to price in the prospect of even more rate cuts.
In spite of the move in yields it still remains clear that any move will be very much data dependant which means the next payrolls and wages number is likely to be instructive. For all of this it is also apparent that markets are looking for more, in what increasingly looks like a case of the tail wagging the dog. As expected the Fed was dovish, however in response the market appears to have decided that it wasn’t dovish enough and is pricing in the prospect of the Fed having to do even more.
Despite the Federal Reserve’s dovish tilt last night markets still appear to be mispricing the pace at which the Fed is likely to move this year. While the change of tone in the statement was notable, and can be argued that a cut is now much more likely, there was nothing in the Fed’s tone to suggest that a cut in July was a done deal.
Yesterday’s UK inflation numbers didn’t offer much in the way of clues as to whether the recent noises coming from the likes of the Bank’s chief economist Andrew Haldane, and external MPC member Michael Saunders were likely to get any louder with respect to the prospect for higher rates.
If anything, the fact we slipped back to 2% means that the Bank of England is bang on target when it comes to its inflation mandate. This week’s unexpectedly dovish turn from the European Central Bank also makes it much less likely that the UK central bank will be in a position to hike in the near future.
ECB President Mario Draghi’s remarks earlier this week, may well have been slightly off-piste so to speak but nonetheless they remove any likelihood that the ECB will move in any other direction than lower in the coming months.
As for the Bank of England with the Brexit deadline extended to October and the latest economic data showing signs of softening, any talk of rate hikes is increasingly looking detached from reality, whatever these two policy makers might have you believe. That doesn’t mean we couldn’t see the bank try to adopt a slightly more hawkish bias, if only to try and put a floor under sterling after 7 weeks of declines against the euro.
EURUSD – appears to have found some support at the 1.1180 area and could well see a return to the 1.1270 area. The downside prevails towards 1.1110, while below the 200-day MA at 1.1370.
GBPUSD – could well have seen a short-term base at 1.2505, however we need to see a move back through the 1.2760/70 area to shift the emphasis to the upside.
EURGBP – feels like we may have topped out at 0.8975? A move through the 0.8870 level could well open up a move towards the 200-day MA at 0.8780, with 0.8820 interim support. While 0.8870 holds the risk is for a return to the highs this week
USDJPY – having found support at the 107.70/80 area we’ve edged back higher but need to push back through the 108.80 area to retarget a move to the 109.20/30 area. Bias remains to the downside and the 106.00 area, while below the 109.20 area.