Will the Fed pull the trigger?

Global equities went through the roof yesterday amid hints from Mario Draghi that the ECB was ready to launch another round of stimulus should inflation fails to accelerate. The EuroSTOXX 50 jumped as much as 2.60% to 3,458 points, the highest level since early May, while US equities were also better bid with the S&P 500 hitting 2,930 points, up 1.40% on the session as investors speculate that the Federal Reserves would follow on the ECB’s footsteps.

Over the last few months, Donald Trump has put significant pressure on Fed Chair Jerome Powell as he blamed him for derailing the US economy by unnecessarily tightening monetary conditions. Interestingly enough, the trade war against China, which was triggered by President Trump, worsened the situation as it accelerated the global economic slowdown and forced the Fed to pause its quantitative tightening as well as further rate cut. Now, it looks like Trump would get those rate cuts in the end. The single currency fell across the board with EUR/USD falling 0.40% to below 1.1181 but stabilised around 1.12. The limited downside size move in EUR/USD suggests that market participants anticipates the Fed would also turn more dovish than at its May meeting.

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However, according to Reuters, it looks like Mario Draghi’s colleagues did not expected such a dovish speech and said that the possibility of a rate cut or the extension of quantitative asset purchases have been mentioned but that there was no consensus. Therefore, we anticipate that Powell would introduce a dovish twist but nothing significant. Indeed, the current economic conditions do not justify going in full easing mode, especially as it would spread panics among investors.

BoE should trigger a GBP rally

Not much has changed in the Bank of England rhetoric. Despite investors pricing in a rate cut by year-end amid slowing manufacturing activity, Brexit uncertainy, and dragging trade discords, BoE policymakers still maintain their hawkish bias, favoring rising rates at a faster pace than financial markets would consider. It is therefore very likely that the BoE statement or policy minutes from Thursday monetary policy meeting will continue to hint towards further tightening, most likely giving British pound a boost. Yet probability of an up-move is still less reasonable under current circumstances.

Despite manufacturing PMI in contraction territory at 49.4 for the first time since July 2016 and y/y industrial production hitting -1% in April and in negative territory for the first time this year, real wage growth excluding bonuses increased 3.4% while unemployment remains at historical bottom, supporting the BoE’s stance. Yet the release of second quarter GDP in 28 June should give investors a good view where the UK economy is heading. Although domestic consumption most likely improved, a fall in fixed asset investments due to potential hard Brexit risk should ultimately weigh on the GDP figure. Accordingly, the likelihood of seeing the BoE raising rates this year is rather low as Brexit scenarios (deal, no-deal and article 50 extension) are still opened following 31 October 2019 deadline.

GBP/USD is expected to gain support amid Fed, BoE monetary policy meetings. Heading along 1.2606 short-term.

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