The US dollar is the king of G10 currencies, it continued its climb after the Fed’s monetary policy. The Fed president, Jerome Powell, warned the markets against a new trend of interest rate yesterday. In other words, he found a way to disappoint the markets and traders were caught off guard. This triggered a massive sell off in stocks yesterday.
Investors over in Europe are picking up on this momentum and ready to build on it. This means another negative session for stocks.
We do not believe that the Fed is only going to cut the interest rate only once this year, we think there is more to come The reason behind this is that traders didn’t pay close enough attention to Powell’s words. Remember, the Fed is still data dependent and he did leave the door open for more interest rate cuts if the data continue to deteriorate. Therefore, the term “start of an easing cycle” doesn’t mean much.
What needs the most attention is the tweet by President Trump following the Fed decision. Trump made it clear in his tweet that he isn’t happy with the Fed. This means that the president is likely to push the Fed for more interest rate cuts.
Closer to home, Mark Carney, governor of the Bank of England, isn’t going to be in any rush to jump on the global easing bandwagon. He is likely to acknowledge that there is a sharp slowdown in the growth, a lot of this is mainly due to Brexit, but the governor is going to highlight that there is a spill over effect of shaky global growth.
The fact is that the BOE needs clarity when it comes Brexit, and with new prime minister in the office, the bank has a lot to learn about him. So far, the new prime minster, Boris Johnson has taken a very hard stance against Brexit, he is not afraid of leaving the EU with no deal. If this takes place then it means that the bank is highly likely to open the liquidity taps to address any issues. However, the fact is that no one knows if that would be ever enough.
Looking at the market curve, it shows that the expectations of interest rate cut are 50 bps lower than in May and this is because under the current scenario, orderly Brexit doesn’t seem plausible.
Just like the Fed, the BOE has also been data dependent when it comes to their monetary policy decision. Thus, looking at it from this perspective and given that the 2Q growth has taken a nose dive and this means that the bank cannot adopt hawkish monetary policy stance. Also remember that during June’s meeting minutes, the bank did acknowledged that the growth has stagnated. So, expect dovish Carney today and sterling may move even lower on the back of this.
