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Fed outlines lower for longer, Bank of England up next

Fed outlines lower for longer, Bank of England up next

US markets finished rather mixed last night in the wake of last nights Fed rate meeting, with tech stocks once again standing out for all the wrong reasons. Here we saw another sell-off with the Nasdaq leading the decliners, with Facebook falling back sharply in the aftermath of reports that the company is likely to face an antitrust investigation from the Federal Trade Commission.

Facebook isn’t alone in facing scrutiny from regulators, with Google also being questioned and yesterday’s reports were a reminder, if any were needed, that increased regulation is a clear and present danger to the current rally in the tech space, even more so in an election year, and the polls slightly in Biden’s favour.

This weakness is likely to feed into a softer open in Europe this morning, as markets digest last night’s Powell press conference, and the lack of any concrete new steps with respect monetary policy.

There were no real surprises from last nights Fed meeting with the US central bank pledging to keep rates well anchored until 2023, or at least until inflation has been higher than 2% for quite some time. That’s certainly an ambitious bar for their new policy of average inflation targeting given that over the last 20 years core PCE has only been above 2% twice in the last decade, during a short period in 2012, and for most of 2018, when the bank was in the middle of a series of rate rises.

With a dual target of also wanting to achieve maximum employment, it is clear that the Fed wanted to send a message that rates are going nowhere in not only the short term, but also the medium term as well. Of course that doesn’t mean that this new policy will be any more successful than its previous one, and the overall market reaction more or less reflects that reality.

The Fed’s problem particularly with respect to this meeting was the political backdrop with an election in just over 6 weeks’ time, and their next meeting due just after the Presidential vote.

Ultimately there was not much else the Federal Reserve could do or can do given the challenges facing the US economy, slowing retail sales as well as the deadlock on a new fiscal stimulus program. This was the very least they could deliver given the current economic and political climate. There were a couple of dissenters on last night’s decision with Minneapolis Fed chair Neel Kashkari and the Dallas Fed’s Robert Kaplan standing apart, however this was more to do with the style of the guidance than the actual substance.  

With the Bank of Japan also leaving monetary policy unchanged overnight, it’s the Bank of England’s turn later today with respect to its latest policy decision reverting back to the more agreeable time of 12pm.

There has been a lot of chatter in recent months about the likelihood of whether the Bank of England would go down the negative rate route, to the extent that it has become rather tedious, and a little predictable.

While Bank of England officials have been careful not to rule out the possibility of such a move the reality is that any such move would be extremely damaging to the UK financial sector which makes up such an important part of the UK economy. At least the US Federal Reserve has implicitly ruled out the prospect of such a move, perhaps mindful of the damage it has done in Europe and Japan.

No changes are expected today, however given the direction of travel of some of the data yesterday, particularly the sharp 5.8% fall in factory gate prices, some bank officials might be minded to be a little bit more dovish in tone in anticipation, that core prices could slip even lower than the 0.9% number we saw yesterday, and a headline CPI number that could slip closer to zero in the coming months.

The only problem with an easier monetary policy stance is that while there is little leeway on rates, if the MPC were to do more QE, there’s no guarantee it would boost demand.

The risk of higher unemployment as we head into the winter months, is likely to choke off consumer spending quicker than anything, at least until the economic outlook picks up. In any case even if further stimulus were offered or flagged by forward guidance, consumers don’t appear to be any hurry to take on much in the way of extra liabilities, despite a modest pickup in consumer credit in July.

The deflationary pulse that appears to be building up in the global economy is likely to be reflected in today’s latest final EU CPI numbers for August which are expected to be confirmed at -0.2%, with core prices at 0.4%.  

US weekly jobless claims are set to remain steady at 850k, a slight reduction from last weeks 884k, however it is becoming clear, that despite the improvement in the jobless numbers the outlook still looks bleak.

EURUSD – continues to slip back towards the August neckline support, after failing to push back above the 1.1900 level yesterday. This failing momentum could see a move back lower with a break below 1.1720 suggesting a move towards 1.1500. Above 1.1920 retargets the 1.2000 area.  

GBPUSD – the pound has continued its tentative recovery off the 1.2750/60 area and 200-day MA support, moving above the 1.2920/30 area to close in on the next key resistance level at 1.3020. The risk remains for a move lower through 1.2730 towards the 1.2500 area, while below the 1.3030 area.  

EURGBP – has continued to slide back breaking below the 0.9170, which suggests the top is now in. We now look for a test of the 0.9080 area which is the next area of support, while 0.9170 becomes resistance  

USDJPY – found support at 104.80 yesterday but we look set for move towards 104.20 while below the 105.30 area. Above 105.30 retargets the 106.20 area.

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