Rates: No surprises from the Fed
The Fed kept its policy unchanged and prepared a June rate hike. The US central bank sounded more upbeat in its inflation assessment, but added that the 2% target is symmetric. It suggests no intention to step up the tightening cycle if inflation overshoots the target and probably explains the slight correction lower at the front end of the US yield curve.
Currencies: Fed brings balanced message for the dollar
Yesterday, the dollar remained well bid going into the Fed policy decision. The Fed might allow a slight overshoot of the inflation target. This could be slightly negative for ST US yields and the dollar. However, for now the ‘damage’ for the US currency remains very limited. Tomorrow’s payrolls might decide whether there is room for further USD gains.
The Sunrise Headlines
- US stock markets closed 0.5% to 0.75% lower yesterday. An attempt to gain ground after the Fed statement failed miserably. Asian equity indices lose up to 0.5% with Hong Kong underperforming (-1.5%).
- The Fed kept its monetary policy unchanged, but sounded more confident in the inflation outlook, suggesting more tightening ahead. A reference to its “symmetric” inflation target suggests no speeding up the hiking pace for now.
- A US trade delegation arrived in Beijing for key talks over tariffs, with Chinese state media saying China will stand up to U.S. bullying if needed but that it was still better to hash things out around the negotiating table (Reuters).
- UK PM May is facing a crisis after pro-Brexit ministers paired up with Conservative hardliners to demand a clean break from the EU’s customs system, rejecting her plea for a compromise solution. (BB)
- The UK House of Lords voted 309 to 242 in favour of a change to the government’s EU (Withdrawal) Bill, designed to protect the Irish peace process in another blow to PM May’s government. (BB)
- Trump lawyer Giuliani said the president had repaid his longtime attorney, Cohen, for a $130k payment he made to a former adult film star in October 2016 in exchange for her silence about an alleged sexual encounter. (WSJ)
- Today’s eco calendar contains EMU inflation data, the services PMI (UK) / ISM (US), US weekly jobless claims. The Norges bank holds its policy meeting. Spain & France tap the market and several ECB governors speak.
Currencies: Fed Brings Balanced Message For The Dollar
Fed brings mixed message for the dollar.
The dollar stayed well bid yesterday going into the Fed decision. The Fed left its policy unchanged and signalled more gradual normalization. Powell and Co explicitly said that the 2% inflation target is ‘symmetric’. This suggests it might accept some ST inflation overshoot without taking bolder action. Short-term US yields and the dollar dropped slightly after the Fed statement, but the USD correction was modest and short-lived. EUR/USD closed the session at 1.1951. USD/JPY finished at 109.84.
Asian equities mostly show moderate losses overnight, joining the slightly disappointing reaction of US equities to the Fed statement. The dollar runs into resistance. EUR/USD rebounded to the high 1.19 area. USD/JPY loses a few ticks (currently 109.65area). The Aussie dollar tries a cautious rebound on better than expected foreign trade and housing data. AUD /USD (0.7520 area) dropped temporary below 0.75 earlier this week, touching the lowest level since mid-2017.
The eco calendar is well filled today EMU headline inflation is expected to ease to 1.3% Y/Y. The report might ‘approve’ the cautious ECB approach (slightly euro negative?). The EC updates its economic forecasts. The US calendar contains the non-manufacturing ISM, weekly jobless claims and the trade balance. The ISM is expected to ease slightly to 58.0. We also keep an eye at the prices subseries of the report. The dollar remained well bid yesterday despite a balanced Fed statement. The focus now turns to tomorrow’s US payrolls. EUR/USD came close to the 1.1936 support area (62% retracement), but a real test didn’t occur. USD/JPY tested the 110 big figure. We expect some consolidation on the recent USD rally today. The payrolls will probably have to be solid (including wages) to support further USD gains short-term.
Sterling enjoyed a temporary short-squeeze yesterday supported by a good UK construction PMI. However, the move petered out soon as Pro-Brexit Ministers rejected a middle-of the road solution for the post-Brexit relationship with EMU. EUR/GBP returned to the 0.88 area. The UK services PMI is expected at 53.4 (from 51.7) today. We see a slight asymmetric risk: sterling might be more sensitive to a negative surprise rather than to a small positive surprise. Brexit noise will proably persist and might continue to weigh on sterling.
EUR/USD: dollar rally to slow as Fed maintains balanced approach?
