Fed drop rates
Headline CPI inflation fell more than expected, down to 1.7% in August from 2.1% in July. The core inflation rate fell to 1.5% from 1.9%, figures last seen at the tail-end of 2016. The Pound dipped lower in anticipation of a relatively dovish Bank of England monetary policy decision at today’s meeting.
EU chief negotiator Michel Barnier implied Brexit talks weren’t actually being conducted and called for legally-robust solutions. Jean-Claude Juncker warned over the risks of a ‘no-deal’ in light of the rising tensions. Sterling peaked just above 1.2500 but the Dollar strengthened following the Fed decision. DUP leader Arlene Foster stated that her party was prepared to be flexible on Brexit, Pound sentiment improved with a peak near 1.1330 before the Euro recovered. A few EU governments demanded solid Brexit proposals from the UK within two weeks and Sterling was held below 1.2500. UK Retails sales data will precede the UK Interest Rate Decision.
The Federal Reserve (Fed) cut interest rates by 0.25% to 2.00% last night which was in line with consensus forecasts. Rosengren and George dissented as they wanted to leave rates at 2.25% while Bullard also dissented as he wanted a deeper 0.50% cut.
According to the statement, the economy has been expanding at a moderate rate and the labour market has remained strong. Household spending had been rising at strong pace, but investment was weak. The committee will continue to monitor the implications of incoming information for the economic outlook and act as appropriate to sustain economic expansion.
The median projection of individual rate forecasts by FOMC members suggested that interest rates would not be cut again in 2019, but 7 of the 17 members did project a further cut. The statement overall was seen as slightly hawkish given a confident statement and renewed doubts over further rate cuts and the dollar strengthened with Chair Powell again expressing the move as insurance against trade and international risks.
The Euro continues to struggle for any directional bias after the Federal Reserve’s hawkish rate cut. The currency pair has been restricted to a narrowing price range since 12th Sept from 1.0995 to just above the 1.11 figure.
As the Fed cut its interest rate by another 25 basis points for the second straight meeting, officials however, were split on the need for further easing with five seeing no change in rates by the end of the year, five wanting one more cut and seven expecting two cuts. Hence, most observers believe the Fed may be done cutting rates for now.
The market therefore, may look to price out a rate cut expectations in December leaving the the Dollar better bid in the short-term, especially against the Euro, with the newly adopted strong dovish bias from the ECB.
Data to watch
09.30 GBP – Retail Sales
12.00 GBP – BOE interest Rate Decision