- Rates: All eyes on the Fed
US Treasuries heavily outperformed German Bunds yesterday with oil prices losing almost 5%. Today’s Fed meeting is key. Markets expect tonight’s hike to be the final one this cycle. The Fed will offer a contrasting view in its dot plot. Bear flattening of the US yield curve should be the logical market reaction. If not, the Fed has a credibility issue. - Currencies: Will Fed unlock EUR/USD stalemate?
The dollar lost slightly further ground as interest rate differentials moved against the US currency going into the Fed policy meeting. The Fed is expected to deliver some kind of dovish rate hike. Will Powell and Co be able to convince markets that (current & projected) rate hikes won’t kill growth, preventing further USD losses?
The Sunrise Headlines
- Wall Street closed flat (S&P 500) to 0.5% higher (Nasdaq). Opening gains (+1%) melted away as another drop in the oil price weighed down the energy sector. Asian bourses are mixed this morning with China and Japan underperforming.
- Oil prices dropped further with Brent crude below $56/barrel (-4.5%). API said that US crude inventories rose last week, putting the effectiveness of production cuts further in doubt with investors worried about global demand as well.
- The National Bank of Hungary kept its policy rate unchanged, but no longer thinks that maintaining loose monetary conditions is necessary with core inflation expected to pick-up. EUR/HUF fell from 323.5 towards 322.
- Italian officials said that Rome has a technical agreement with EU officials on next year’s budget (2.04% of GDP deficit target) which needs to be ratified later today. Italy would avoid sanctions over its spending plans thanks to the deal.
- Senate GOP leaders are preparing a short-term bill to avoid a partial government shutdown as early as this weekend with the White House signalling readiness to drop its demand for $5bn to pay for a border wall.
- US Treasury Secretary Mnuchin said that the US and China are planning face-to-face January meetings to negotiate a trade war truce. Both countries’ vice ministers held discussions by phone this morning.
- Today’s economic calendar contains the final Fed meeting of the year. A 25 bps rate hike is discounted, but how will new forecasts look like? UK CPI, US existing home sales and a speech by ECB Hansson are second tier events.
Currencies: Will Fed unlock EUR/USD stalemate?
Will Fed unlock recent EUR/USD stalemate?
EUR/USD was well bid yesterday morning, but the US dollar regained modest ground later. The German IFO-indicator was slightly weaker than expected, but this was apparently discounted after last week’s poor EMU PMI’s. EUR/USD was also supported by narrowing US/EMU interest rate differentials. US equity volatility eased compared to previous days. The intraday decline in US yields slowed (albeit temporarily), providing some breathing space for the dollar. Still, US yields finished near intraday lows (oil-related?). The dollar lost modest ground in a daily perspective. EUR/USD closed at 1.1361 (from 1.1348). USD/JPY finished at 112.52 (from 112.83). Asian markets are trading mixed, but China and Japan are declining after a better start. Chinese officials and US Treasury secretary Mnuchin indicate that trade talks continue. More meetings are planned for January. This news doesn’t really help to comfort investors for now. The dollar remains slightly in the defensive. EUR/USD is trading in the 1.1385 area. USD/JPY hovers in the 1.12.20/60 area. There are only second tier eco data in the US and Europe today. The EU and Italy are close to a budget agreement. If finalised, it might remove a euro negative factor. However, the Fed policy decision will be the all-decisive factor. The Fed is expected to deliver some kind of ‘dovish’ rate hike. Investors’ focus will be on the Fed dots and chairman Powell’s assessment at the press conference. Of late, the dollar lost substantial interest rate support as markets sharply reduced expectations on 2019 Fed rate hikes. Will Powell be able to convince markets that (recent and projected) Fed rate hikes won’t kill growth? The dollar in general and EUR/USD in particular showed an indecisive trading pattern lately. We are not convinced this will change after today’s Fed decision. A perceived too hawkish Fed will cause more global market volatility and further flatten the US yield curve. However, is such a risk-off context supportive for the euro with EMU growth also slowing? A moderate tone from the Fed might ease growth concerns. In this respect, the scenario of a rate hike, dots signalling 2 instead of 3 2019 rate hikes and less strict Fed forward guidance, shouldn’t be too bad for the dollar.
EUR/GBP hovered sideways close to, mostly slightly below the 0.90 mark as there was little ‘new’ news on Brexit yesterday. UK price data (CPI) and CBI order data will be published today. Data had little impact on sterling trading of late. Still, soft inflation data might be a slightly sterling negative going into tomorrow’s BoE meeting
EUR/USD: Will a ‘dovish’ Fed rate hike prevent further USD losses?
