18 Mar 2019: FOMC meeting to confirm dovish outlook

FOMC meeting to confirm dovish outlook

March 18th: Highlights

  • Weak data opens the possibility of a rate cut this year
  • May to “try again” as opposition to the Withdrawal Agreement weakens
  • French budget proposals to attract Brussels’ concern

Weakening U.S. Industrial Production fuels fears over economy

This weeks’ meeting of the rate-setting Federal Open Market Committee in the U.S. was expected to be something of a non-event as its Chairman Jerome Powell was seen as simply confirming the stance is being taken following a series of rate hikes throughout 2018.

However, there are growing concerns that the economy is slowing more than had been originally expected as the effect of the rate hikes is now fully “priced-in”. Data for industrial production and capacity utilization, released on Friday, showed that output barely grew in February and there is a continued slackening off in capacity usage which confirms industry is slowing.

Following weaker than expected employment data and inflation which is well controlled, there is a growing view that the Fed may be at the end of what will have been an extremely shallow rate hike cycle and the next move in rates could well be a cut.

Following a long period of inaction globally following the rate cuts and quantitative easing that followed the financial crisis, the Fed could be accused of being too sensitive to market fluctuations and while it is still very early to consider a rate cut, the end to the Fed’s reduction in the size of its balance sheet, which in itself will be accommodative, may be sufficient to regain market confidence.

On Friday the dollar index continued its recent correction, falling to a low of 96.49 and closing at 96.55. It has started the new week on the back foot although it has stayed within Friday’s range.

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Yet another significant week for Brexit

It is widely expected that UK Prime Minister Theresa May will return to Parliament this week for a third and, what must be, final attempt to secure backing for the Withdrawal Agreement she concluded with Brussels late last year.

Having suffered two crushing defeats already, Mrs May is banking on the fact that the alternative, a long and possibly indefinite delay to the UK’s departure from the EU, will be far less palatable to MP’s.

If there is a vote this week and the bill is passed, the Prime Minister will go to Brussels to ask for a short delay, probably until June 30th to enable Parliament to pass the required legislation. However, should the Bill fail to gain support, the delay that is asked for will be far longer and will mean that the UK will probably have to field candidates in the European elections which take place in May.

The Chancellor of the Exchequer, Philip Hammond appeared on TV yesterday and confirmed that if the Government failed to gain the support of the Northern Irish MPs who have been supporting Mrs May’s minority Government, the Bill would not be presented to the House of Commons and that will heighten the risk that Brexit may never happen.

The financial markets have become relatively sanguine to the prospect of a delay to Brexit and the pound has remained stable. There is a clear disconnect between the economic effect of the uncertainty that is likely to continue and the view of traders that the softer Brexit is the better.

On Friday, the pound traded between 1.3301 and 1.3203 versus the dollar, closing at 1.3294. It has barely moved overnight as traders adopt a wait and see approach to developments this week.

“Yellow vests” returning to French streets

The civil unrest that was seen towards the end of last year in France, which forced President Macron to reverse unpopular economic policies, has started to re-emerge as the public are concerned that the austerity that is forced by compliance with EU budget restraint will lead to further cuts in public services.

Given the linkage between all economies of the Eurozone, despite there being no single fiscal policy, any French budget deficit which breaks the EU guidelines will have to be stamped on by Brussels, given its uncompromising attitude to a similar situation in Italy.

It is becoming clear that one of the tools open to the EU commission to head off the rising risk of a recession is to lessen the tight grip that compliance with the growth and stability rules in order to boost Government spending.

Brussels, doubtless prompted by German concerns, will worry about growing debt to GDP ratios but it may come down to a choice between a long and potentially catastrophic recession which could lead to the demise of the entire project and a greater debt burden going forward.

With nationalistic views on the increase and candidates from the right likely to feature strongly in forthcoming elections, it is going to be a difficult period of the entire region in the coming months.

The single currency remains in reactive mode and is mirroring the dollar.

On Friday, it traded in a 1.1345/1.1299 range, closing at 1.1325. Today, trade data will be released which is likely to see a fall given the uncertainty surrounding the global economy exacerbated by the continuing lack of agreement between the U.S. and China.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”