Powell Set to Provide Additional Insurance

The dollar declines as a liquidity squeeze subsides, while the Fed are set to announce another 25bps rate cut as further insurance against a slowdown.

Previous Day's Market Highlights

Markets went from a spike in oil prices to a liquidity squeeze on Tuesday, with a shortage of dollars in money markets resulting in overnight borrowing rates spiking as high as 10%. This dollar shortage, seemingly sparked by companies pulling cash out of the market to make tax payments, led the Federal Reserve to launch a seldom-seen operation to maintain the effective fed funds rate within the target range. Put simply, the Fed swapped Treasuries (being held by banks) for dollars in order to restore order in money markets and prevent interest rates from exceeding the upper bound of the Fed's target range at 2.25%; a process which successfully reduced the repo rate to near-zero. While the intricacies of financial plumbing are a little complicated, the impact on the FX market is clearer to see. The dollar had remained well-supported due to the liquidity squeeze, before losing ground after the Fed's market operations - making it clear that the only thing propping up the greenback was the scarcity of the currency available in the market. Over the course of the day, the dollar settled 0.4% lower against a basket of peers, largely ignoring better than expected industrial production data.

The main beneficiaries of the dollar's decline were the pound and the euro. Cable (GBP/USD) soared from late-afternoon onwards, ending the day 0.7% higher, close to the key $1.25 handle. The common currency recorded similar gains, adding 0.6% to erase Monday's losses. The euro was also assisted by better than expected, though still incredibly pessimistic, sentiment surveys from the ZEW research institute, with respondents citing the ECB's recent stimulus package, and receding concerns over a no-deal Brexit, as reasons for the improvement. As if to exemplify the lack of significant Brexit-linked headlines, the pound trod water against the euro. 

Elsewhere, markets were relatively quiet, with apprehension ahead of tomorrow's FOMC policy decision (preview below) the overriding theme. The Aussie, Kiwi and Canadian dollars all settled largely unchanged, the latter struggling amid a slide in oil prices. 

Speaking of oil prices, market participants remained attune to developments in the Middle East, as the fallout from the weekend's pipeline attack continued. The US seem to now be firmly blaming Iran for the attack, indicating that a cruise missile was used, potentially raising the chances of an escalation in tensions. Meanwhile, Saudi Arabia indicated that production would be fully restored within 2-3 weeks, resulting in oil prices sliding. Global benchmark Brent settled 6.55% lower, while US WTI crude lost 5.7%.

Finally, global equity markets were mixed amid lower volumes ahead of the FOMC policy decision. The pan-European Stoxx 600 closed 0.1% lower, while the US benchmark S&P 500 gained 0.25%, closing less than 1% away from its all-time high.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1280 1.1314 1.0930 3.39%
GBP/USD 1.2495 1.2527 1.1958 4.54%
EUR/USD 1.1070 1.1164 1.0926 2.13%
GBP/AUD 1.8240 1.8336 1.7792 2.97%
GBP/NZD 1.9705 1.9721 1.8996 3.68%
GBP/CAD 1.6565 1.6608 1.5956 3.93%

Today's Market Highlights

All eyes will be on Washington DC today, with the Federal Reserve set to continue the theme of a 'mid-cycle policy adjustment' at today's rate decision by announcing another 25bps rate cut, bringing the target range for the fed funds rate to 1.75% - 2.00%. Markets have fully priced such an outcome, with the easing set to be framed as providing additional insurance against the growing headwinds facing the economy - namely, the US-China trade war. Those hoping for a more dovish message from the Fed, including the market pricing of 50bps of rate cuts by year-end, may be disappointed, with upward trending inflation and strong consumer spending likely to deter the FOMC from adopting a more aggressive path of policy loosening. The decision to cut rates is, however, unlikely to be unanimous. Despite this, policymakers will likely maintain their stance of 'acting as appropriate' to sustain the economic expansion; indicating that, while further easing may be necessary, it is not guaranteed. 

The policy outlook will be of more interest for financial markets, with a 25bps cut today fully priced in, and seemingly a done-deal. Hence, in addition to the language used in the policy statement, keen attention will be paid to the Fed's Dot Plot, indicating individual policymakers' expectations of the likely trajectory of interest rates. Market participants will also pay close attention to the Fed's latest economic forecasts, likely to show expectations for economic growth downwardly revised due to the sluggish pace of business investment. For the dollar, a 'hawkish cut', a rate reduction which gives little explicit sign of further easing, poses an upside risk, and will likely result in another irate tweet from President Trump. In contrast, downside risks appear limited, with a significant degree of easing already priced in.

Elsewhere, a host of releases are due before the FOMC's decision, though markets will likely trade in a cautious manner ahead of the policy announcement. From the UK, markets will not only be keeping an eye on the ongoing Supreme Court hearings over the prorogation of Parliament, but will also parse this morning's CPI inflation release. The report is expected to show CPI increased at 1.9% YoY last month, broadly in line with the Bank of England's target, and not significantly altering the policy outlook ahead of Thursday's rate decision. CPI figures will also be in focus from the eurozone and Canada, though the former should be taken with a pinch of salt as the data references August, before the ECB's sweeping stimulus package was announced. The Canadian release will be of more interest, set to show prices increasing at 2.0% YoY last month, in line with the Bank of Canada's target. 

Overnight, a couple of antipodean releases will be in focus as markets react to the Fed's policy decision. From New Zealand, 2nd quarter GDP figures will be eyed, with any impact from escalating US-China trade tensions of particular interest. The data is expected to show the Kiwi economy growing at 0.4% QoQ, and at 2.0% YoY. Labour market figures from Australia will also be in focus, with an expected uptick in the unemployment rate, to 5.3%, raising the chances of an RBA rate cut next month. Finally, the Bank of Japan will announce their latest policy decision in the early hours, with though no policy tweaks are expected.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:30am GBP CPI (YoY - Aug) 1.9% 2.1%
10:00am EUR Final CPI (YoY - Aug) 1.0% 1.0%
10:00am EUR Final Core CPI (YoY - Aug) 0.9% 0.9%
1:30pm CAD Canada CPI (YoY - Aug) 2.0% 2.0%
7:00pm USD Federal Reserve Interest Rate Decision 1.75% - 2.00% 2.00% - 2.25%
7:30pm USD Fed Chair Powell Press Conference