Rates: US Treasuries gain after FOMC, but focus will turn to Italy today

US treasuries sold off quite sharply this month in’ the run-up to yesterday’s FOMC meeting. The Fed hiked its policy rate and kept forecasts for 2018-2020 broadly unchanged. A sell-the-rumour, buy-the-fact reaction lifted US Treasuries afterwards. Attention will turn to Europe today, with the 2019 Italian draft budget. It might turn out to be a tough day for BTP’s.

Currencies: Dollar keeps the benefit of the doubt post-Fed.

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The Fed policy decision/guidance brought no big surprise yesterday. The Fed will continue on the path of gradual rate hikes. The dollar showed no clear directional reaction, gaining a few ticks in a daily perspective. This morning, EUR/USD dropped to the 1.17 area, but his is Italy-related rather than Fed-induced. EUR/USD 1.1815/51 still looks like a tough resistance.

The Sunrise Headlines

  • US equity markets closed yesterday’s trading session with losses, after a full day in green. This morning most Asian exchanges are losing ground , except a few. China and Japan are underperforming the bunch.
  • The Federal Reserve has, as expected, raised its policy rate by 25bp to 2%-2.25%. Chairman Powell remained upbeat about the US economy despite looming trade wars. A fourth rate hike in December is expected.
  • The IMF has increased its three-year emergency lending program for Argentina from $50 billion to $57 billion, on the condition that Argentina’s central bank allows the peso to float freely and only intervenes in the FX market in extreme circumstances.
  • Italian media report the cabinet meeting today to decide on the 2019 budget targets may be postponed. The League party is said to join the Five Star Movement in seeking a 2.4% deficit, compared to FM Tria’s target of 1.6%.
  • US President Trump accused China of meddling in the 2018 mid-term elections. His director of national intelligence, Dan Coats, told reporters that China’s cyber activities in the US were unprecedented. China denies everything.
  • New Zealand’s central bank left its policy rate unchanged at a record low of 1.75%. Governor Orr added that the he expects to keep it at 1.75%, but signalled he would be prepared to cut interest rates if the economy fails to gather pace.
  • Today’s eco calendar contains jobless claims and durable goods orders in the US, economic confidence for the EMU. Germany releases September inflation numbers. ECB’s Draghi and Praet, BoE’s Carney and Fed’s Powell are speaking today.

Currencies: Dollar Keeps The Benefit Of The Doubt Post-Fed

USD to maintain the benefit of the doubt post-Fed? The dollar traded soft of late, but gained a few ticks in the run-up to the Fed decision. The Fed as expected raised its policy rate by 25 bp. The Fed communication (dots, statement, and press conference) signals a continuation on the path of gradual rate hikes. The Fed message was little different from August. At the same time, markets continue to anticipate a rate path that is materially softer than the Fed’s indication. The Fed sees growth slowing over the 2018/21 horizon, but the policy rate stays above the neutral rate (3.0%) end 2021. So, the Fed assessment includes factors that could both be used to support a hawkish and a dovish view. This was also visible in the market reaction. Both US yields and the dollar were looking for direction. The US yield curve bull flattened, with yields at longer maturities losing a few bp. The USD jumped up down but finally finished marginally stronger (EUR/USD close at 1.1740; DXY at 94.91). Overnight, Asian equities are mostly losing modest ground. EUR/USD slipped to the low 1.17 area. However this wasn’t Fedinduced, but due to press headlines that a key meeting on the Italian budget might be delayed. Today, eco data include EC confidence data, German inflation, final US Q2 GDP and US durable orders. EC confidence is expected slightly softer while German headline inflation is expected unchanged (1.9% Y/Y). US durable orders /shipments are expected solid. Data might be slightly more supportive for the dollar than for the euro. Italy might be an additional source of euro uncertainty. Yesterday’s Fed meeting didn’t bring any spectacular news. Even so, we think that the Fed assessment on the economy and indications on monetary policy should be ‘strong’ enough to provide downside protection for the dollar. We keep the working hypothesis that a break of EUR/USD beyond 1.1815/1.1851 won’t be evident ST. The recent USD/JPY outperformance might become a bit less outspoken. Yesterday, sterling traded sideways against the dollar but regained further ground against the euro.We didn’t see much progress in Brexit. Today, there are no UK data. BoE’s Haldane and Carney will speak. Brexit noise will proably continued to guide the intra-day GBP-gyrations. Italy might be a slightly negative for EUR/GBP, too. For now, we assume that any further sterling rebound shouldn’t go much further than recent EUR/GBP correction low near 0.8850

EUR/USD: Fed brought no high profile news, but USD downside might remain well protected

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