The outcome of the last FOMC meeting was mostly in line with expectations. Little changes were made to the statement and the tone of the press conference suggested that the committee is comfortable with the current policy set-up. Indeed, against the backdrop of relatively solid recent economic data, especially on the employment side, it would be very difficult for Jerome Powell to justify a loser monetary policy. While on the other hand, it is unthinkable to expect a tougher stance as inflationary pressures remain muted (… and the economy cannot cope with higher rates). GDP growth and headline inflation projections were left unchanged, while unemployment rate projections have been lowered for the next 3 years. Core inflation forecast for 2019 has been lowered to 1.6% compared to 1.8% in September. That’s it, it was almost a copy/past. Against such a backdrop, the Fed will most likely remain sidelined in 2020 and would maintains its policy stance. The greenback suffered losses following the press conference as gold jumped to $1,478 before erasing gains partially. USD/CHF eased to 0.9814, the lowest level since early September, while EUR/USD climbed to 1.1145, suggesting that market participants were expecting a more hawkish stance from the Fed.
Investors have already shifted focus towards the ECB and the Brexit vote. Christine Lagarde will hold her first ECB press conference later this afternoon. We expect her to maintain Draghi vision and signal confidence in the growth and inflation outlooks. She will also most likely remind everyone that the European central bank stands ready to inject more liquidity into the system should the situation warrant it. We anticipate that the current 20bn/month QE purchase will be maintain until at least the end of next year, while interest rate should not be pushed further into negative territory as long as the economic situation does not deteriorate substantially. Expect some erratic movement during the press conference but no change of trend.
Finally, regarding today Brexit vote, the Tories are expected to win Thursday’s general election but they should not be able to secure a parliamentary majority, according to latest poll. The pound sterling continued to climb higher with GBP/USD reaching 1.3229, the highest level since late March this year. On the upside, a key resistance can be found at 1.3381 (high from March 13), while on the downside the 1.28 psychological threshold will act as main support. Looking at implied volatility, it looks like the market is buying protection against a short-term pound sell-off: 1-week 25 delta risk-reversal measure fell to -4.10%, while ATM implied volatility hit 18.80%, compared to 9% a week ago. Therefore, in case of a solid Tory victory, the pound should rally further as uncertainty fades away and investors cover short bets.
