Markets
The Fed’s hawkish rate cut yesterday left markets pondering US monetary policy going forward today. Powell’s team cut rates with 25 bps but signaled it probably won’t be the start of many to come. The rather strong repositioning at the long(er) end of the US yield curve didn’t met with follow-through price action during Asian dealings, on the contrary. US – and to a lesser extent German – bonds opened lower and kept a downward trajectory during European hours (yields up to +5 bps). However risk sentiment faded as the US started waking up. American investors clearly haven’t yet fully digested the disappointing Fed meeting yesterday. Equity markets turned south, the yen gains (see below) and global core bonds swap losses for solid profits. The US yield curve shift south with yields declining 2 to 3 bps across the curve. German yields currently trade close to unchanged, with the exception of the 30-yr yield (-3 bps). It’s 10-yr yield is now trading well below -0.4% (-0.44%). Peripheral spreads widen amid risk off. Italy underperforms (-5 bps).
USD trading was mainly driven by follow-through repositioning in the wake of yesterday’s Fed communication. Fed chair Powell surprised markets with a ‘hawkish’ rate cut which he doesn’t expect to be the start of a protracted easing cycle, but rather a pre-emptive action to protect the US economy from weak global growth and uncertainty on global trade. The market had hoped for more outspoken Fed commitment to support the economy. The rather harsh Fed stance propelled the dollar, pushing EUR/USD below the 1.11. Today, the picture was for the dollar was less straightforward as one could have expected in the wake of yesterday’s Fed decision. EUR/USD followed the ‘standard script’. Follow-through USD gains pushed the air to the 1.1030 area. However, the price action in USD/JPY shows a different picture. The pair touched the highest level in more than two months overnight (109.30 area), but returned back to the 108.50 area during the day. The price action in USD/JPY is also in line with US interest rate markets The US 2-y yield (almost) completely reversed the post-Fed rise. Longer-term US yields are even drifting below the levels seen a earlier this week. So, USD investors clearly remain puzzled on the meaning for markets and for FX trading of yesterday’s Fed communication. To be continued. EUR/USD trades currently (1.1145 area), slightly off the intraday lows. A weak US non-manufacturing ISM can further weaken the post Fed dollar rebound.
Today, (sterling) investors at least temporarily turned their focus away from the Brexit headlines and hoped to get some insight in the BoE reaction function in case of a no deal scenario. However, the BoE stayed muted. The Bank still gives only a detailed assessment on inflation and on the consequences of monetary policy in case of a no-deal scenario. The bank lowered its growth forecast and acknowledges the risk for the currency due to uncertainty on Brexit. However, there was little guidance on how the bank will react to a situation of both a weak pond and at the same time a sharp slowdown in growth. Sterling had a remarkably calm trading session today. EUR/GBP hovered in the lower half of the 0.91 big figure.
News Headlines
The Czech central bank kept rates unchanged at 2% today, citing “anti-inflationary” risks to its new forecast set. The central bank raised its 2020Q3 inflation projections to 2.2% (from 2%) and to 2.1% (from 2%) in Q4. Growth for this year is estimated at 2.6% (from 2.5%) and 2.9% (up 10 bps) for 2020 while adjusting Czech koruna projections downwardly (25.5 in 2019 from 25.3 earlier, 24.9 in 2020 vs. 24.7). EUR/CZK rose slightly after the CNB’s decisions.
The US manufacturing ISM unexpectedly fell from 51.7 to 51.2 in July. Markets anticipated a marginal rise to 52.0. Production declined dramatically (50.8, down from 54.1). Employment also decelerated strongly (51.7 vs. 54.5) while new export orders effectively declined compared to June (48.1, contraction territory).
