Fed Cuts, Dollar Flies

The US central bank duly obliged markets by cutting the Fed funds rate by 0.25% yesterday evening. The initial reaction to the news smacked of a degree of disappointment as some out there had hoped for a 50bp cut. Personally, I never thought that likely and to some degree I was disappointed they acted at all. Indeed, two Fed governors actually voted for no change (Rosengren and George) so, the decision to lower rates wasn’t a unanimous one by any stretch.

The equity markets edged lower on the news and the dollar pushed higher, with the USD Index breaking above that 98.35-40 level I have been mentioning for quite a while now. Consequently, downside stops were tripped through 1.1100 on the EURUSD and later, after quite a bit of toing and froing,the price fell further, during the post rate decision press conference. The reason for that was largely down to mixed messages from the Fed boss.

However, the upshot of all that Powell had to say, was that the Fed is very much on a data dependent path from now on following, what he termed as a ‘mid-cycle’ move. Initially the equity markets tanked on the inference; that the Fed may not necessarily be looking at a lengthy easing cycle. Despite a degree of equity market risk aversion, the stronger dollar also did for gold as that too fell foul of Powell’s narrative, shedding nearly $25 from its earlier highs ahead of the US close. Indeed, the metal is lower again this morning, edging its way back close to the $1400 handle.

Now, the one thing that surely stopped the US equity markets from suffering a really serious negative day was the message from the Fed that low inflation coupled with clear signs of a wider global slowdown could lead to more accommodation in due course. Having said that, the upshot of last night’s Fed move was that it was as close to ‘one and done’ as it could be whilst still leaving the door ajar.

So, now that the fed has eased, the dollar has pushed higher at the same time as US equity markets have fallen back. This hasangered the idiot in chief no end. Everyone knows he wants higher stocks and a lower dollar. Well, right now he’s being denied on both fronts it seems. Meanwhile the USD index closed on a new two-year high yesterday at 98.56.

Conundrum for the Old Lady Today

The fall in the pound this week sure has made for some tough decisions for the Bank of England today. The opportunity to launch a pre-emptive Brexit hike is something they might have discussed and with the Fed lowering rates last night, the Bank might be forgiven for thinking this could be an idealopportunity to grab a short term boost for the currency.

However, as previously discussed, I think that’s all it would do. So, with the odds of a no deal departure rising by the daythat’s the last thing the UK economy needs right now. Moreover, if anything there’s a stronger argument for them to follow the Fed’s move last night. Problem is that would only send the pound even lower and also fuel the very thing they ultimately want to avoid- inflation. Under the current circumstances such a move is unlikely to reap much benefit for the economy either.

So, this is a very difficult situation for Mark Carney and his MPC colleagues today. Seems to me that whatever they do it will prove counterproductive. Consequently, they probably have little choice, but to sit on their hands again and wait to see how the situation develops over the coming weeks. Almost certainly the Bank’s quarterly inflation report and press conference today is likely to be an uncomfortable one for the Governor. Trying to make accurate growth and inflation forecasts under the current circumstances is surely nigh on impossible.

Meantime, the wider markets are not taking all the latest news too well. The risks of an all out currency war are clearly rising. So far that battle isn’t going too well for the US president and the irony of all this is that the pound, whilst weakening the most, is not winning either. For my money its only a question of time before the GBPUSD takes out 1.20 to the downside. As previously stated, many many times before, I am not putting a downside target on this one because I simply don’t know just how far it could fall.

Elsewhere the EURUSD, which closed below 1.11 last night for the first time in over two years, looks like it has more downside traction. Whilst 1.10 might hold some psychological support the next technical level of real note in my view lies beyond there at 1.0864.  

As for the USDJPY, well the move higher back through 109.00, assisted by US yields rising slightly overnight has also helped the Nikkei outperform relative to its peers. Whilst generally still sideways inside 105-110 from the medium term perspective; the chances of a break back above 110.00 could be live as long as equity markets don’t tank and risk aversion halts the downside for the Japanese currency.

That brings me back to the pairing I mentioned in a previous article; the GBPJPY which whilst steady for now, in between 131.50-133.00, I am continuing to monitor this one very closely. Beyond all that has transpired over the past 12-24 hours, the markets will now be focusing on what the US employment report has to offer tomorrow. Unless that’s seriously weak, then the dollar is not going to give up its gains easily.

Important Economic Releases Due Today and Tomorrow

01/08- 12.00pm Bank of England Monetary Policy Decision

            (Consensus- No changes expected)

01/08-12.30pm BOE Post Policy Decision Press Conference

01/08- 3.00pm US July ISM Manufacturing Index

02/08- 1.30pm US July Unemployment Report and Non Farm Payrolls