Fed Points to Rate Cuts

The Fed strike a dovish tone, pointing to rate cuts while the central bank bonanza continues today with the BoE and Norges Bank.

Previous Day's Market Highlights

The Federal Reserve kept interest rates unchanged on Wednesday, though joined the global shift to looser monetary policy by opening the door to rate cuts - which the market sees coming as soon as July. Policymakers struck a relatively dovish tone, emphasising that the FOMC is prepared to ‘act as appropriate’ to sustain the economic expansion, while seeing uncertainties on the economic outlook, namely US-China trade, as key when determining future monetary policy changes. The Fed’s dot plot, showing individual policymakers’ expectations of future rates, showed 8 out of 17 policymakers expecting rates to move lower this year, with dovish voting member Bullard even calling for an immediate 25bps cut. Meanwhile, the FOMC’s economic forecasts remain largely unchanged, though core PCE, the Fed’s preferred inflation gauge, is not seen as returning to target until 2021 - possibly a sign of further rate cuts to come. On the whole, the removal of the word ‘patience’ from the FOMC’s statement signifies a bias to policy easing, which may come as soon as July should US-China talks at the G-20 summit fail to conclude in a deal. For the dollar, the decision was largely as expected. The greenback had come under pressure during the day, ahead of the decision, and extended its losses after the policy announcement, ending the day 0.5% lower against a basket of peers.
 
Elsewhere, the pound gained as steady CPI figures helped to underpin sterling. Data showed CPI increasing at 2% on a year-on-year basis in May, in line with the Bank of England’s target. A drop in core CPI to 1.7% - the lowest level since January 2017 - was largely shrugged off due to the temporary nature of volatile airfares. The pound ended the day 0.7% higher against the dollar, while adding 0.35% against the euro. The common currency also gained on Wednesday, adding around 0.4% against a weaker dollar after the dovish Fed policy decision. Meanwhile, yesterday’s most significant mover was the loonie, which gained 0.5% after better than expected inflation figures. CPI increased at 2.4% on a year-on-year basis, the fastest rate since October 2018, while core CPI also smashed forecasts, increasing at 2.1% YoY. The positive inflation figures should see the Bank of Canada retain their neutral bias, a factor likely to underpin the Canadian dollar while other central banks shift to the dovish side of the spectrum. 
 
Overnight, the Bank of Japan have kept monetary policy settings unchanged, maintaining interest rates at their record-low of -0.10%. The BoJ maintain that a modest expansion of the Japanese economy is likely to occur, though struck a note of caution, emphasising that the impact of overseas downside risks must be closely watched. The yen trades around 0.4% higher this morning, though the movement is largely due to a weaker dollar, with the BoJ’s policy decision in line with expectations. 
 
Away from FX, european equity markets struck a quiet tone as most bourses closed unchanged in hesitant trading ahead of the Fed’s policy decision. Across the pond, the US benchmark S&P 500 is closing in on a fresh record-high, adding 0.3% on Wednesday, with the prospects of looser monetary policy underpinning the market. Finally, oil prices fell, though erased earlier losses after a bigger than expected fall in inventories. Benchmark Brent lost 0.15%, while US WTI crude shed 0.45%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1260 1.1376 1.1141 2.07%
GBP/USD 1.2695 1.2763 1.2506 2.01%
EUR/USD 1.1275 1.1348 1.1107 2.12%
GBP/AUD 1.8390 1.8422 1.8113 1.68%
GBP/NZD 1.9305 1.9513 1.9053 2.36%
GBP/CAD 1.6790 1.7135 1.6755 2.22%

Today's Market Highlights

The recent central bank bonanza continues today, with policy decisions due from the Bank of England and the Norges Bank. Markets expect no change to policy from the BoE, though the possibility of a dissenter voting for a hike should not be ruled out after recent hawkish comments from MPC members Haldane and Saunders. Even in the case of a unanimous vote, the BoE are likely to maintain their tightening bias, stating that ‘gradual and limited’ hikes will be necessary to bring inflation in line with target over their forecast horizon. Furthermore, the BoE may reference that rates could rise faster than the current market path implies, echoing Governor Carney’s recent comments. For the pound, while a hawkish message would provide some support, any rallies should be relatively short-lived due to ongoing political uncertainties. The BoE won’t be holding a press conference after the decision, though Governor Carney does give his annual Mansion House Speech this evening, which may provide some clues on future monetary policy decisions. 
 
Meanwhile, in Norway, the Norges Bank continue to go against the grain of global monetary policy, with the Bank set to announce their 3rd 25bps rate hike in less than a year this morning. Rates should be increased to 1.25%, leaving the Norges Bank as the hawkish outlier amongst G10 central banks, and underpinning the NOK. Of more interest to markets will be the likely future monetary policy path, with another hike later this year possible due to continued above-target inflation and strong GDP growth. 
 
Turning to economic data, the calendar is relatively busy. From the UK, May retail sales figures are due this morning. The typically volatile data set is set to show sales decreased by 0.5% last month, the steepest fall in 6 months. Meanwhile, the core measure (excluding fuel) is also expected to show a 0.5% decline, with both measures likely to raise concerns over the health and confidence of the UK consumer. Elsewhere, no major releases are due from the eurozone, while markets will examine a couple of US releases this afternoon. Both weekly jobless claims and the Philadelphia Fed’s manufacturing index are due - the latter likely of more interest after the New York Fed’s similar gauge recently experienced its biggest one-month fall on record. Market participants will be attempting to gauge whether weakness in the manufacturing sector is limited to one region or more widespread. Overnight, CPI figures from Japan will be eyed as inflation remains benign in the Land of the Rising Sun. Headline CPI is expected to dip modestly, increasing at 0.7% on a year-on-year basis in May. The less-volatile core measure, excluding fresh food, is set to fall to a 3-month low, also at 0.7%. 
 
Finally, there will be no escape from UK politics, with the first stage of the Conservative Party leadership contest set to conclude today with the final two rounds of MPs ballots. The final two, likely Boris Johnson against either Hunt, Gove or Javid, is set to be announce around 6pm this evening, before the candidates are put to a vote of Conservative Party members. A new leader, and Prime Minister, should be announced on 22 July. Meanwhile, in Europe, the latest EU Summit will take place today - though not on Brexit - as EU leaders continue to deliberate over the allocation of top jobs including the ECB Presidency. While a decision is unlikely today, markets will be particularly interested in the likely identity of Draghi’s successor and their monetary policy standpoints.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:30am GBP Retail Sales (m/m - May) -0.5% 0.0%
9:30am GBP Core Retail Sales (m/m - May) -0.5% -0.2%
12:00pm GBP Bank of England Interest Rate Decision 0.75% 0.75%
1:30pm USD Weekly Jobless Claims (Jun 14) 220k 222k
1:30pm USD Philadelphia Fed Manufacturing Survey (Jun) 11.0 16.6
12:30am (Fri) JPY National CPI (y/y - May) 0.7% 0.9%