Rates: Fed cuts policy rate by 25 bps and signals end to mid-cycle adjustment
The Fed cut its policy rate for a third straight meeting by 25 bps to 1.5%-1.75%, but dropped its direct pledge to act as appropriate to sustain the expansion. The bar to cut rates if eco data deteriorate further is nevertheless lower than the one to resume last year’s hiking cycle in case of some upward inflationary pressure.
Currencies: Hawkish cut. Dovish pause. USD eases slightly further
The dollar spiked briefly higher after the Fed policy decision, but move was (more) than reversed during the press conference as the bar for a Fed rate hike remains very high. Post-Fed, we see a slightly asymmetric risk with the dollar still more sensitive to weaker rather than to stronger data. EUR/USD nears intermediate resistance at 1.1179
The Sunrise Headlines
- Wall Street edged higher (up to 0.43%), fuelled by the Fed’s rate cut and some strong earnings reports. The S&P set another record high. Asian markets are trading mixed, with China underperforming (-0.6%).
- China’s manufacturing sector continues to struggle, with the PMI slipping deeper into contraction in October (49.3 from 49.8). Non-manufacturing fell more than expected and to the lowest since early 2016 (52.8).
- The BoJ kept its monetary policy steady today but strengthened its policy pledge on interest rates, underscoring its concern over simmering overseas risks that could derail the country’s fragile economic recovery.
- The Fed slashed its policy rate by 25bps to a target range of 1.5%-1.75% for the third time this year but downplayed expectations of further cuts for the time being unless the economic outlook changes materially.
- The US and China encountered a new obstacle in their struggle to end a dragging and damaging trade war on Wednesday, when the APEC-summit where they were supposed to meet was cancelled because of violent protests.
- Brazil’s central bank cut its policy rate by 50bps to 5% for a third straight meeting and signalled it will stick to its current pace of easing amid a sluggish economy and low inflation which is expected to remain below target for now.
- Today’s economic calendar will be centred around US PCE data and EMU Q3 GDP and inflation numbers. Markets will closely watch US eco data aiming to assess the Fed’s policy path ahead
Currencies: Hawkish Cut. Dovish Pause. USD Eases Slightly Further
Hawkish cut. Dovish pause. Dollar eases slightly
USD traders took a wait-and-see approach ahead of the Fed decision yesterday. EMU and US eco data were mixed and provided little reason to adapt positions. The Fed as expected cut its policy rate by 25 bps. Fed Powell’s saw current monetary policy as appropriate as long as the economy develops along the expected path of moderate/sustained growth, a strong labour market and inflation close to 2%. At the same time, tightening isn’t necessary as long is inflation stays close to target. The dollar spike briefly higher after the decision, but US yields and the dollar returned south as the bar for rate hikes stays high. EUR/USD closed at 1.1152 (from 1.1112). USD/JPY finished at 108.85.
This morning, Asian equities show mixed picture even as WS closed in positive territory yesterday. The BOJ left its policy unchanged but strengthened its forward guidance to leave interest rates at current or lower levels to address the risk of not reaching to inflation target. So, the BOJ didn’t shoot its last bullet. The yen strengthened slightly after the decision. USD/JPY trades near 108.70. Dollar (trade-weighted) also eases slightly further (97.35 area). EUR/USD trades near 1.1160.
Today, EMU Q3 GDP and October preliminary CPI will be published. Both series are expected to confirm recent sluggish EMU picture. In both cases, the reference of the consensus is low (GDP 0.1% Q/Q, CPI 0.7% Y/Y). Risks, if any, are on the upside, but the euro probably won’t be impressed. US Sept spending is less important after yesterday’s GDP release. USD traders will look forward to tomorrow’s ISM and Payrolls.
After the Fed decision, the dollar might maintain a slightly asymmetric reaction function, with the US currency still being a bit more sensitive to weaker rather than to stronger US data. The technical picture of EUR/USD remains moderately constructive. After a pause, first intermediate resistance at 1.1179 is again within reach. A break above 1.1250 would improve the ST picture. The downside looks better protected with first support at 1.1073.
Over the previous days, the EUR/GBP cross rate was locked in a tight sideways consolidation pattern. The prospect of new elections reopened a wide range of (political & economic) options which are difficult to price of the (FX) market. Recently, we took the view that sterling trading could become rather erratic but that quite some good news was already discounted for sterling. We maintain this assessment
EUR/USD nears first intermediate resisance, as USD won’t receive interest support anytime soon
