The Fed changes strategy
The US Federal Reserve Bank has not put an end to its rate-hike cycle, it is just moving away from well-telegraphed moves. After eight hikes over the last three years, the Fed is at an inflection point against the backdrop of slowing global growth and weaker inflation pressures. The Fed’s is switching from well-telegraphed monetary decisions to a more data dependent, on-the-go approach. Starting next year, Jerome Powell will hold eight press conferences, compared to only four this year.
Investors have become increasingly negative about inflation. The 2-year breakeven inflation rate eased more than 50bps to 1.285% in less than two months. Against such a backdrop, investors are switching attention towards the other central banks and more particularly the European Central Bank, which is expected to end its quantitative easing program by the end of the year. EUR/USD bounced back and stabilised around 1.14 over the last couple of days. We maintain our bullish EUR/USD view; however, one should keep an eye on the ongoing Brexit negotiations and Italy/EU clash.
October’s core personal consumption expenditure – the Fed’s favourite gauge of inflation – eased to 1.8% annually versus 1.9% expected and a downwardly revised figure of 1.9% in the previous month. And not just inflation has been disappointing. Last week, the economic surprise index went negative for the time since October 2017.
EU shares hold, despite trade tension
On the verge of closing the week in positive territory following two negative weeks, European equities are trading in negative territory. Investors hope a deal on the Italian budget is coming, as the Italian lower house of parliament is expected to vote on 3-4 December on the 2019 budget plan. Procedural sanctions from the EU Commission are not expected to come into effect before January, leaving a little room for Italian Premier Giuseppe Conte to secure agreement from deputies Matteo Salvini and Luigi Di Maio. We don’t expect the Italian Eurosceptic coalition to make large concessions. Despite a positive closing for Asian shares in advance of the G20 summit, European indexes are heading lower on Friday. The Euro Stoxx 50 is trading at -0.28%, UK FTSE 100 -0.53%, French CAC 40 -0.42% and German DAX -0.42%. EUR/USD is losing ground, trading at 1.1386 (-0.06% intraday) and heading along 1.1350 short-term.
