Fed to be “event-driven”

At his press conference following last evening’s 25BP cut in the Fed Funds rate, Jerome Powell, the Chairman of the Federal Reserve, was equivocal about when there will be a further cut. Powell opened his remarks by saying “Let me be clear this is not the first in a long series of cuts”. He then went on to say, “I didn’t say it’s just one cut”.

While this action was widely expected, traders expected a little more clarity about forthcoming actions and overall there was disappointment about the comments which will drive speculation about the future path of interest rates. There was almost a sense of reluctance in Powell’s words as he cited myriad reasons for the cut. The economy has grown at a healthy pace so far this year but there have been positives and negatives. Manufacturing output has declined for two consecutive quarters, and global growth remains sluggish.

Successive members of the FOMC had called for a single cut as an “insurance policy” against any future slowdown and there was a sense from Powell’s comments that this was the reason for the cut.

One person singularly unimpressed by both the 25bp cut and Powell’s comments was President Trump. He tweeted that what the market wanted to hear was that this was the beginning of a long and aggressive rate-cutting cycle, but as usual, Powell has “let us down”. Trump went on to say that rate cuts were needed to “keep pace with China”. He appeared to infer that the U.S. should get into a “tit-for-tat rate-cutting feud” with China to decide whose economy was slowing fastest.

Asset markets were unimpressed too, with the main stock indexes closing around 1% lower. However, the dollar soared, with the index reaching a high of 98.68, closing at 98.57. Overnight it has continued to strengthen, reaching a high (05.30BST) of 98.94.

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Euro remains pressured as support broken

News of an imminent rate cut in the Eurozone had a very different effect on the currency than the confirmation of a cut in the U.S.

Yesterday, the euro fell through strong support deemed to be around 1.1100, falling to a low of 1.1060 and closing at 1.1077. Overnight it has continued to fall making a low of 1.1033.

Yesterday’s data releases in the region were barely supportive for the euro either. A strong number for retail sales in Germany for June was offset by poor year on year figures which saw consumer activity fall by 1.6% in the year to June.

GDP data was lower than Q1 at 1.1%, following Q1’s 1.2% although it was marginally better than market expectations. While Germany grabs the “data headlines”, the other major economies of the Eurozone continue to struggle. Inflation remains sluggish in Italy while in Spain, GDP was lower than both the previous release and market expectation.

There seems to be little that can be done to arrest the slide in the value of the euro although with inflation remaining well below the ECB’s 2% target, a weaker currency will eventually bolster exports as and when the global economy starts to pick up.

Unfortunately, a global pickup appears to be heavily linked to talks between Washington and Beijing and there are concerns that the outcome may be less dramatic than the markets expect given both Presidents recent downgrading of expectations.

Sterling recovers then dips versus strengthening dollar

While there is only one game in town when it comes to drivers for Sterling, the short term was dominated by the FOMC and its rate cut yesterday. Today, the market’s attention will switch to the meeting of the Monetary Policy Committee of the Bank of England which takes place later this morning.

While there are no expectations whatsoever for a change in short term rates in the UK, the comments following the meeting, the first since Boris Johnson’s appointment as Prime Minister, will be significant. Governor Carney is unlikely to refer directly to what appears to be a headlong dash towards a no-deal Brexit, but he is sure to refer to the increased risks for the economy.

The pound, which rose to a high of 1.2250 yesterday as traders took profits on short positions, fell back to close 11 pips higher on the day at 1.2160.

Inflation in the UK is starting to move following a sustained period of higher wage increases and the precipitous fall in the value of the currency versus both the dollar and single currency is sure to add to inflationary pressures.

Sterling had its worst month since October 2016 in July as concerns over a no-deal Brexit grew with Johnson’s appointment.

As the new Prime Minister’s “honeymoon period” comes to an end, his supporters will expect him to start to “get to grips” with trying to get Brussels to first reopen negotiations then discuss the changes he wants to be made.

A King Canute style of “if I say it, it will happen” may work on the campaign trail but reality could be a lot different.