The Federal Reserve reduced its benchmark interest rate last night for the first time since the financial crisis of 2008 to protect the US record-long economic expansion from slowing global growth and trade uncertainties. In a widely-anticipated move, central bankers voted to cut rate by 25 basis points to 2-2.5 per cent.
Subsequently, the Dollar rose to a two-year peak against the Euro, hitting $1.1034 – the level that has not been seen since 16 May 2017. It also jumped to a two-month high versus the Yen as Fed Chair Jerome Powell ruled out a lengthy monetary easing cycle. The Pound also suffered against the Dollar. Sterling dropped by 0.3 per cent to $1.2125, having earlier hit $1.2101 – the lowest since January 2017.
Powell’s comments dampened expectations of further cuts running into 2020. However, many feel one more cut is highly likely before the end of the year, particularly after Powell said, “I didn’t say it’s just one cut.” The Fed claimed that despite a solid labour market and strong consumer spending, investment is soft and inflation remains below its 2 per cent target.
The central bank also said the Federal Open Market Committee (FOMC) will monitor the global market and act appropriately. The “one and done” cut may be off the table, but the latest rhetoric indicates this as a mid-cycle insurance cut, with further cuts being only small and limiting the downside risk for the Dollar. Fed fund futures are forecasting a further 25-basis-point cut in September at 60 per cent and another one in November at 100 per cent.
The Dow Jones ended the day 333 points down, its worst performance since May, as many feel the Fed was sending a confused message. US President Donald Trump tweeted his displeasure, stating Powell had “let us down”.
Attention now turns to the Bank of England (BoE), which is due to announce its interest rate decision and publish its inflation report later today. Reuters’ poll suggests that the Monetary Policy Committee (MPC) will vote 9-0 to keep rates on hold at 0.75 per cent. However, the focus will be on BoE governor Mark Carney’s comments around the challenges faced by the UK is the country leaves the European Union without provisional trading agreements.
Markets are pricing in further risks of a no-deal Brexit, with Sterling expected to make more losses. Despite the mixed message from the Fed, the Dollar remains on the front foot, particularly given the fact that Prime Minister Boris Johnson has filled his cabinet with Brexit supporters. Any reversal of Sterling losses will be linked to market sentiment and a breakthrough in EU negotiations.
Today, Europe will publish its latest Purchasing Manager’s Index (PMI) data and the UK its manufacturing PMI data at 09:30 (GMT). The BoE’s rate decision and inflation report are due at 12:00, with Carney’s speech at 12:30. US unemployment claims data will follow at 13:30, and ISM manufacturing data will round the day off at 15:00.
Pound struggles as attention turns to Fed
ECB holds rates firm
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