Fed sinks dollar and equities
The US Federal Reserve Bank yesterday lifted interest rates for the fourth time this year, but Chairman Jerome Powell suggested the pace of increase could slow down significantly in 2019. “The Committee judges that risks to the economic outlook are roughly balanced but will continue to monitor global economic and financial developments and assess their implications for the economic outlook.” In other terms, it means that the Fed will embrace a wait-and-see approach next year. The Fed is now expecting two rate hikes next year, compared to three suggested in September.
Markets were expecting a more dovish response from the Fed. After rising 1.5% ahead of the meeting, the S&P 500 collapsed 78 points and ended up the day down 1.54% at 2,506 points. More importantly, the Blue Chip index broke a key support (2,532.69 from 9 February 2018) as it closed at its lowest since October 2017. In FX, the greenback extended losses during both the Asian and early European sessions. EUR/USD rose 0.90% to 1.1480, while the Dollar Index gave up 0.75%. This is not the end of the sell-off, as the Fed continues to withdraw liquidity from the market at a pace USD 50 billion a month. The US economy has no choice but to deleverage.
British interest rates stuck
The Bank of England has no choice today but to maintain its monetary policy rate, unchanged since August 2018. Following the vote of no confidence from last Tuesday and convincing talks with the EU relating to the Irish backstop, the BoE will not move. Inflation accelerated moderately in November, with annual and monthly CPIs given at 2.30% and 0.20% (prior: 2.40%, 0.10%). The scenario of a Brexit deal, with a little less than 100 days to go under current deadline term, does not provide the central bank enough room of manoeuvre, as cases of deal or no-deal would render totally different effects on the British economy. The British pound, which largely recovered from yesterday’s dovish rate hike from the Fed, is expected to weaken further, as monetary policy remains paralyzed under such circumstances. The cable is currently given at 1.2682 (year-to-date: -6.06%), gaining 0.36% from yesterday’s Fed hike. Short-term, GBP/USD is expected to drop following BoE announcement, heading along 1.2605.
