Fed to cut later in the year or just buying time?

At the FOMC meeting before this week’s, Chairman Jerome Powell commented that the Fed would use “patience” in its deliberations over the need to cut short-term interest rates later in the year.

Following the meeting which ended yesterday with an announcement of no change in rates, Powell softened his language somewhat which the market took as an indication that rate cuts are coming. However, for some, his past reticence to “play the game” and provide advance guidance by way of “coded messages” has led to a feeling that the Fed’s members are buying time, maintaining a view that the slowdown is more perception than reality.

President Trump virtually told Mr Powell yesterday that a failure to cut rates will cost him his job.

When asked about the FOMC meeting, the President commented that the strength of the dollar is hurting U.S. exporters. Trump officially launched his 2020 re-election campaign yesterday calling the U.S. economy “the envy of the world”.

This brings into question his understanding of the reason why there is a possible need for rates to be cut outside of a move to artificially weaken the dollar. This was, of course, the charge Trump levelled at Mario Draghi earlier in the week.

Following the Feds announcement, the dollar index, which had been weak all day, fell to a low of 97.08 a move which has been continued overnight in the Asian market. It has so far (05.25BST) reached a low of 96.86 and remains close to that level.

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Sterling recovers despite Johnson lead growing

Later today, the final two contenders for the Leadership of the Conservative Party will be known.

There are potentially two votes today with the contender with the lowest number of votes in each ballot leaving the “competition”.

Rory Stewart, whose performance at the leadership debate held on TV on Tuesday evening was “below par” by his own admission, received the lowest number of votes in yesterday’s ballot and has been “knocked out.”

This leaves the heavy hitters: Sajid Javid, Michael Gove and Jeremy Hunt. They are set to face off today for the chance to face Boris Johnson in the members vote.

Clear frontrunner Johnson increased his share of the vote yesterday, receiving seventeen more supporters among MPs.

Inflation data was released yesterday and, as expected, the headline rate fell back to the Government’s target of 2%. Today sees a meeting of the Bank of England’s Monetary Policy Committee and it will be interesting to see if Governor Carney is as dovish as his colleagues at the Fed, ECB, and perennially dovish Bank of Japan.

With a hard Brexit looming, it is likely that Carney may add further caution to his statement although any comment on politics would be way outside his remit.

The pound took a day off from concerns over a no-deal Brexit yesterday as the dollar fell following the FOMC meeting, providing some impetus. It reached a high of 1.2674, closing at 1.2643, and has made a fresh high of 1.2690 so far overnight. The pound also gained versus the single currency reaching a high of 1.1271, closing at 1.1261.

“Draghi effect” to last some time

ECB President Mario Draghi has, over most of his time in the role, been considered a dove. The fact that he has never been able to hike rates adds to that view. Of course, he chairs the ECB’s Governing Council where the head of every Eurozone Central Bank has an equal vote, but the decisions made at their meetings always seem to be attributed to Sr. Draghi.

That burden will pass to someone else soon enough, but for now, the comments made following this week’s meeting will reverberate around financial markets.

While the Fed may be buying time there is little doubt that that is what the ECB is doing.

Following the ECB’s meeting this week, the market is pricing in a cut of ten basis points this year while the Central Bank strives to find a way of dealing with negative interest rates.

The fall in the value of the Euro versus the Dollar, which was temporarily suspended yesterday, is likely to return over the coming days or weeks. The economy continues to slow with the best it can hope for being a painful “bump along the bottom” of economic activity.

Manufacturing and services activity data are due for release tomorrow in France, Germany and the region as a whole. They are expected to remain weak although the German data may improve slightly, albeit from a very low base which remains in contraction.

The dollar is likely to remain weak while the market further digests Chairman Powell’s remarks which means the single currency may see further gains, although “normal service” will be resumed shortly. Yesterday it reached a high of 1.1254, closing at 1.1225, although overnight it has rallied to a high of 1.1273.