Fed Set to Deliver

Sterling consolidates around 2-year lows ahead of today's expected FOMC rate cut - but what comes next?

Previous Day's Market Highlights

Sterling continued to hover close to more than 2-year lows against the dollar, and 22-month lows against the euro, on Monday, with the pound remaining pressured by ongoing political uncertainties and the market pricing in the increased risk of a no-deal Brexit. The majority of the pound's losses came in Asian trading overnight, with sterling consolidating around $1.2150 and €1.0900 throughout the European and North American sessions. As highlighted yesterday, the balance of risks for the pound remains tilted to the downside, with little by way of a catalyst to reverse the recent downtrend. While a hawkish surprise from the BoE on Thursday, Parliament blocking a no-deal Brexit or either the UK or EU giving ground in talks would all be cause for a reversal in the pound's fortunes, none of the scenarios seem likely at present. Over the course of the day, sterling settled 0.5% lower against both the dollar, the pound chalking up its biggest 4-day losing streak in just under 3 years. Sterling also closed around 0.5% lower against the single currency.
Elsewhere, data from the eurozone continued to paint a relatively bleak picture of the economic outlook. Figures showed business sentiment fell for a 6th straight month in July, with the index tumbling to -0.12, the lowest level since September 2013. Broader economic sentiment also suffered, falling to the lowest levels since March 2016, while the consumer confidence index remains firmly rooted in pessimistic territory. Despite businesses becoming more pessimistic on the economic outlook, and the chances of significant ECB stimulus in September remaining high, the euro closed around 0.1% higher against the dollar. 
Speaking of the greenback, the dollar traded in relatively subdued fashion with this evening's FOMC decision stealing market participants' attention. Despite this, a couple of notable data points were released. June's core PCE price index, the Fed's preferred inflation gauge, was softer than expected, increasing by 1.6% YoY, though this will likely have little impact on this evening's rate decision. In contrast, the US consumer remains upbeat, with the consumer confidence index surging to 135.7, well above expectations and an 8-month high. Against a basket of peers, the dollar ended the day unchanged, pulling back from its highest levels since late-May.

Overnight, the Aussie dollar has rebounded, erasing Tuesday's 8th consecutive daily loss, after better than expected CPI figures. Data showed CPI increased by 1.6% YoY in the second quarter, comfortably above expectations, while the QoQ figure increased by 0.6%. The release is promising for the Australian economy, showing that the RBA's back-to-back 25bps rate cuts have had some impact, while modestly diminishing the chances of further significant policy loosening. Elsewhere in the $-bloc, the kiwi dollar closed 0.2% lower, while the Canadian dollar added 0.1%, aided by firmer oil prices.
Away from FX, European equities sank on concerns over US-China trade relations and a string of weak corporate earnings. The pan-continental Stoxx 600 fell 1.45%, the biggest loss since late-May. US equity markets also ended the day in the red, with the benchmark S&P 500 shedding 0.25%. Finally, oil prices firmed as markets expected a large crude inventory draw, with both Brent and WTI settling with gains of more than 1.5%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.0900 1.1246 1.0875 3.30%
GBP/USD 1.2165 1.2587 1.2118 3.73%
EUR/USD 1.1155 1.1285 1.1100 1.64%
GBP/AUD 1.7635 1.8041 1.7560 2.67%
GBP/NZD 1.8405 1.8960 1.8278 3.60%
GBP/CAD 1.5975 1.6445 1.5959 2.96%

Today's Market Highlights

For the first time in more than a decade, the Federal Reserve are today set to announce an interest rate cut, likely a 25bps reduction, bringing rates to a target range of 2.00% - 2.25%. Cutting rates today completes the Fed's shift from 'data dependence' to data independence, with incoming macroeconomic data seemingly giving policymakers little reason to cut -- economic growth is solid, the labour market is tight, consumer spending remains healthy, and inflation is close to target. Despite the firm fundamentals, Fed Chair Powell is likely to frame today's policy loosening as an 'insurance cut' designed to protect the US economy against 'crosscurrents' and prolong the expansion as global growth momentum slows and US-China trade tensions continue. My base case for this evening is a 25bps rate cut, along with the Fed bringing their balance sheet run-off to an early conclusion, as loosening policy through a rate cut while continuing to tighten policy through quantitative tightening (QT) seems rather contradictory. The Fed would like this evening's rate cut to be seen as delivering 'an ounce of prevention', rather than being forced to take more drastic measures should a downturn materialise.
Having fully priced in a 25bps rate cut this evening, key for the dollar, and other asset classes, will be the Fed's signalling on their next policy move. Markets are primed for a prolonged easing cycle, having priced in 75bps worth of rate cuts by year-end, however the Fed appear unlikely to deliver such an aggressive degree of policy easing barring an economic catastrophe. I expect the Fed to keep the door ajar for a further rate reduction later this year, both in the policy statement and Chair Powell's press conference, however the risks to the dollar appear biased to the upside as markets reprice their expectations for monetary policy, and price out an aggressive path of rate cuts.
Elsewhere, several eurozone releases will be in focus, though the immediate market impact may be somewhat muted with focus falling on the FOMC's policy decision. Primary focus will likely fall on this morning's flash GDP figures, the 1st estimate of 2nd quarter economic growth. The data is expected to show economic momentum remaining weak, with GDP set to have increased at the slowest pace since the 4th quarter of 2013 at just 1% YoY. Such a lacklustre GDP print would further strengthen the case for significant ECB stimulus, while also fuelling concerns that Q3 GDP will be similarly weak. Also due from the eurozone this morning are July's flash CPI data, with headline CPI expected at just 1.1% YoY, the slowest pace since February 2018. The less-volatile core measure, which strips out food and energy prices, is expected at 1% YoY, evidencing the continued benign pace of price increases across the bloc. June's unemployment rate will also be eyed, expected to hold steady at an 11-year low of 7.5%
Meanwhile, focus for the pound will remain on political developments, with continued rhetoric increasing the prospects of a no-deal Brexit set to exert downward pressure. Today's only other notable data release will be July's US ADP employment change figures, expected to show 150,000 jobs being added to the economy, though the correlation with Friday's official labour market data remains doubtful at best.

Today's Economic Calendar

Time Currency Release Consensus Previous
10:00am EUR Flash GDP (YoY - Q2) 1.0% 1.2%
10:00am EUR Flash GDP (QoQ - Q2) 0.2% 0.4%
10:00am EUR Flash CPI (YoY - Jul) 1.1% 1.3%
10:00am EUR Flash Core CPI (YoY - Jul) 1.0% 1.1%
10:00am EUR Unemployment Rate (Jun) 7.5% 7.5%
1:15pm USD ADP Employment Change (Jul) 150k 102k
7:00pm USD Federal Reserve Interest Rate Decision 2.00% - 2.25% 2.25% - 2.50%
7:30pm USD Fed Chair Powell Press Conference