Rates: Fed to cut policy rates, but signal end to mid-cycle adjustment
Today’s eco calendar is jam-packed, but the market reaction will be muted ahead of the Fed meeting. We expect a 3rd consecutive rate cut accompanied by a clear reference in the statement that it marks the end to the central bank’s mid-cycle adjustment. Corrective bear flattening of the US yield curve could be the reaction with markets still eyeing two cuts in 2020.
Currencies: Tone of Fed policy statement and data to decide on next USD move
Today’s US data might be slightly negative for the dollar, but markets will focus on the Fed policy decision. A hawkish rate cut shouldn’t be that negative for the US currency. However, any nuance in Powell’s ‘guidance’ might change the USD reaction. Sterling didn’t react much to the decision to hold new elections and will from now be driven by opinion polls
The Sunrise Headlines
- WS fell (up to -0.59%) on the back of dampened optimism surrounding US-Sino trade progress and growing caution ahead of the Fed’s policy decision later today. Asian markets are trading mixed, with India outperforming (+1.43%).
- Sentiment was clouded as a US administration official said yesterday that an interim trade deal between the US and China might not be completed in time for signing at the APEC summit in Chile next month, Reuters reported.
- Boris Johnson won backing in UK Parliament as MPs voted overwhelmingly (438/20) in favour of a snap election on December 12 to end the Brexit paralysis and put the issue back to the people.
- US Treasury Secretary Mnuchin said yesterday he is open to loosening stiffening financial crisis-era liquidity requirements to relieve possible cash crunches in short-term funding markets, Bloomberg reported.
- Japanese retail sales jumped 7.1% (m/m) in September as demand rushed ahead of October’s sales tax hike from 8% to 10%, which is expected to hit consumer spending in coming months.
- Australia’s inflation core inflation (1.6% y/y) remained sluggish and below the RBA’s 2-3% target range in Q3 as the economy absorbed much of its currency’s depreciation, highlighting the RBA’s challenge in reigniting prices.
- Today’s economic calendar contains the Fed’s and Bank of Canada’s monetary policy decision, Q3 GDP prints and the EMU confidence indicator for October. Markets will be all ears for the tone Fed chairman Powell will adopt
Currencies: Tone Of Fed Policy Statement And Data To Decide On Next USD Move
Fed and US data to decide on next USD-move
USD trading was driven by global sentiment and technical considerations yesterday as markets prepared for today’s Fed decision and for key US eco scheduled for the second half of this week. The risk rally slowed in Europe, putting USD/JPY and EUR/USD temporarily under pressure. However, the setback didn’t go far as sentiment improved again early in US dealings. US data (house prices and consumer confidence) were unconvincing. Finally, dollar ceded modest ground against the euro (EUR/USD close at 1.1112) and the yen (USD/JPY close at 108.89).
This morning, Asian equities show a similar caution as was visible on WS yesterday. Headlines on the US-China trade talks are a bit less optimistic compared to of late as sources suggest a partial deal might not be ready for signing at the Chile APEC meeting. Still the yuan trades little changed (USD/CNY 7.0630 area). USD/JPY is drifting away from the 109 pivot (USD/JPY 108.85). EUR/USD is holding stable in the 1.1110 area.
Today, EC economic confidence is expected to hold near recent lows, at best. The first US Q3 GDP estimate is expected to print rather soft (1.6% QoQ). ADP private job growth is expected to slow further (110k from 135k). The data as such might be slightly USD negative, but will be overshadowed by the Fed decision. Markets are positioned for a ‘hawkish’ 25 bp rate cut. In theory, this shouldn’t be that bad for the dollar, but question is how ‘hawkish’ Powell will be. A continued ‘data dependency’ might already sound less ‘hawkish’ than expected.
The technical picture of EUR/USD remains moderately constructive, but the upside momentum waned recently. The tone of Fed’s Powell at the press conference and the ISM/payrolls will decide on the USD short term. Resistance stands at 1.1179/1.1250. A return below 1.10 would reject the better EUR/USD picture. This isn’t our preferred scenario.
Yesterday, sterling profited only very temporarily from Labour agreeing to snap elections. Sterling closed little changed against the euro (EUR/GBP 0.8635) and the dollar, even as the vote was approved in the House of Commons. However, yesterday’s turn still leaves markets with a high degree of uncertainty, both on the nature of Brexit (hard or softer) and even on whether it will take place. Yesterday, we concluded that sterling trading will be at the mercy of the opinion polls and that it could again become more erratic. We maintain the working hypothesis that already quite some good news is discounted for sterling at current levels
EUR/USD: Powell’s tone at Fed press conference and US data to decide on next USD move
