Hawkish Fed Takes Out Additional Insurance

The dollar holds steady as the Fed cut rates, but signal a holding pattern for now; ahead of policy decisions from the SNB, Norges Bank & BoE.

Previous Day's Market Highlights

A divided FOMC announced a second 25bps rate cut in as many meetings on Wednesday, bringing the target range for the Fed Funds Rate to 1.75% - 2.00%. While the decision to ease policy further was framed as providing the US economy with insurance against a deteriorating global outlook amid muted inflationary pressures, not all policymakers were sold on the policy action. Hawkish dissent was in evidence from Boston Fed President Rosengren and Kansas City Fed President George, who both voted to keep rates unchanged. In contrast, über-dovish St Louis Fed President Bullard voted in favour of a more aggressive 50bps rate cut. With a rate cut having been fully priced in before the announcement, increased focus fell on the monetary policy outlook. Policymakers kept the door ajar to further policy loosening, reiterating that they would 'act as appropriate' to sustain the economic expansion, though the dot plot told a different story. The dots showed a median expectation of no further rate reductions this year, with a majority of the FOMC also seeing rates remaining at their present levels, or higher, throughout 2020. This, combined with the largely unchanged and relatively upbeat assessment of the US economy, means Wednesday's policy action could be considered a relatively hawkish cut.

Turning to the market reaction, the dollar firmed after the policy announcement, as investors interpreted the dot plot and policy statement as less dovish than expected, with policymakers not alluding to an aggressive path of policy easing. The dollar gained around 0.3% against a basket of peers, the majority of the gains coming in reaction to the policy decision. In terms of the monetary policy outlook, further easing seems largely contingent on global economic developments, namely the US-China trade war. Further policy easing may be difficult, however, with the FOMC clearly divided. Of course, President Trump was less than impressed with the Fed's action - accusing Chair Powell of having 'no guts, no sense and no vision.' 

Elsewhere on Monday, a plethora of CPI inflation figures were released, though none provoked a significant market reaction. From the UK, data showed CPI increased at 1.7% YoY in August, the slowest pace since December 2016. However, the fall in inflation was largely due to volatile items, hence giving the BoE little cause for concern. The pound was similarly unconcerned by the release, meandering throughout the day, settling 0.3% higher against the euro, and 0.4% lower against the dollar. Sterling did, however, receive a late boost after comments from DUP Leader Foster indicated her belief that a Brexit deal may be possible if both sides are 'flexible'. Meanwhile, CPI releases from the eurozone and Canada provided little in the way of a surprise, with market participants ignoring the releases ahead of the FOMC policy decision.

Overnight, it has been a busy Asian trading session, with the Japanese yen and Aussie dollar the major movers. The yen currently trades around 0.5% higher after the BoJ kept interest rates on hold, and offered no hints that additional policy easing is on the way. In contrast, expectations of a rate cut from the RBA have grown, dragging the AUD lower, after a dismal labour market report showed unemployment increasing to 5.3%, and full-time jobs decreasing by 15,000 in August. The market now fully prices an interest rate cut next month. 

Away from FX, oil prices continued their slide, with Saudi Arabia expected to resume production quicker than expected and stockpiles unexpectedly increasing last week. Global benchmark Brent settled 1.5% lower, while US WTI crude shed 2.1%. Finally, both European and US equity markets closed unchanged, the latter struggling after the Fed gave no indication of aggressive policy easing being on the horizon.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1300 1.1337 1.0930 3.39%
GBP/USD 1.2480 1.2527 1.1958 4.54%
EUR/USD 1.1045 1.1164 1.0926 2.13%
GBP/AUD 1.8375 1.8389 1.7792 3.25%
GBP/NZD 1.9760 1.9727 1.8996 3.68%
GBP/CAD 1.6575 1.6618 1.5956 3.98%

Today's Market Highlights

Monetary policy will remain the centre of attention today, with 3 G10 central bank decisions due. Firstly, the Swiss National Bank (SNB) will likely keep interest rates on hold at a record low of -0.75%; though a tail risk of a 10bps cut, following the ECB's action last week, is present. Barring the slim chances of a cut, comments on the valuation of the franc will be of particular interest, with the SNB having previously described the franc as 'significantly over-valued' when trading around its current levels. Should policymakers jawboning fail to have the desired impact, unilateral monetary intervention to weaken the franc (beneficial for the small, open Swiss economy) cannot be ruled out.

After the SNB, focus will shift to Norway, where the Norges Bank are set to continue bucking the global trend, and maintain a tightening bias. Markets price a roughly 50/50 chance of a 25bps rate hike being announced, the 3rd such action this year, which would bring interest rates to 1.5%. Even if a hike is not announced, policymakers should maintain a hawkish tone, helping to support the NOK. 

Today's final policy decisions comes at noon, with the Bank of England (BoE) set to keep rates on hold. Policymakers' hands remain tied by Brexit-linked uncertainties, though the Bank will likely maintain a notional tightening bias - indicating that 'limited and gradual' rate increases would be needed in the event of an orderly Brexit. Removal of this comment, albeit unlikely, would be negative for the pound. Sterling traders will also be paying keen attention to any Brexit headlines, in addition to keeping an eye on this morning's retail sales data, expected to show sales stagnating in August. The Brexit-related Supreme Court hearings also conclude today, with a decision on the legality of Parliament's prorogation likely early next week.

Elsewhere, reaction to the Fed's interest rate cut will likely be the dominant theme, in addition to investors paying close attention to developing geopolitical risks. A couple of US economic releases may also be of interest, namely last week's initial jobless claims figures, and September's manufacturing activity index from the Philadelphia Fed. The former is expected broadly in line with the 4-week average of 213k, while the latter is expected to show activity dipping, with the index expected to fall 5 points to 11.0. Overnight, August's CPI data from Japan is expected to once again show largely non-existent inflation, expected at just 0.6% YoY.

Today's Economic Calendar

Time Currency Release Consensus Previous
8:30am CHF Swiss National Bank Rate Decision -0.75% -0.75%
9:00am NOK Norges Bank Rate Decision 1.50% 1.25%
9:30am GBP Retail Sales (MoM - Aug) 0.0% 0.2%
9:30am GBP Retail Sales ex. Fuel (MoM - Aug) 0.0% 0.2%
12:00pm GBP Bank of England Rate Decision 0.75% 0.75%
1:30pm USD Initial Jobless Claims (Sep 13) 213k 204k
1:30pm USD Philadelphia Fed Manufacturing Index (Sep) 11.0 16.8