Good morning
The Fed did indeed cut rates 25bps to 4.5% as widely expected but the US dollar did push higher and US equities slumped as the interest rate projections, or the dot plot, suggested higher rates than previously forecast through 2025, 2026 and beyond. Just over 50bps of cuts are now forecast for 2025, down from over 1%, indeed now we are looking at total cuts of just 1% to end 2026. The repricing saw USD shift higher with EURUSD trading down to 1.0345 and GBPUSD to 1.2560.
Powell sounded hawkish when he spoke, saying the economy and policy were in a very good place, while the Fed don’t think the unemployment rate will rise further. Powell said the rate decision was a close one, with Hammack actually voting to keep rates unchanged. Fed have now lowered rates by a full 1% from their peak and Powell has made it clear they will be more cautious with regards to further cuts.
USD is brushing off reports that we could see a government shutdown as soon as Saturday after Trump said he opposed a stopgap funding bill but perhaps the sharp move lower in US equities reflects that risk more. Historically I don’t believe US government shutdowns, as frightening as they sound, have negatively impacted USD to any great extent. I have no doubt someone will prove me wrong on this but that’s my gut feel.
Overnight BoJ kept rates unchanged again as widely expected, USDJPY which had already gained after the FOMC made further gains, lifting up to 156.60 this morning, coming from lows below 151.00 just a week or so ago. One member, Tamura, did vote to raise rates by 50bps. Overall the economy is in line with expectations but BoJ did make it clear they are expecting inflation to rise and as such I think the Jan BoJ meeting is one to watch. For now though, Yen weakness is the key.
NZ GDP overnight very much disappointed, coming is considerably lower than expected with a hefty downward revision to the previous months data as well. No surprise that NZD fell on the report, GBPNZD traded up to 2.2400, over 300 points off yesterday morning levels, while NZDUSD was hit be a combination of the stronger USD and weaker NZD, reaching a low around 0.5610. The Oct 2022 low around 0.5510 is in sight. Expect more rate cuts at the Feb RBNZ meeting, although if I am not mistaken RBNZ have previously said they are not confined to scheduled meetings to cut rates. Perhaps they’ll act before Feb.
AUD failed to make significant gains against NZD, the pair traded up to 1.1075 but after the NZD data and a higher than forecast Aussie inflation expectation number overnight, RBA still on hold and RBNZ on track to cut rates further I’d have thought it the pair could break higher. Currently 1.1055, AUD weakness is more pronounced against GBP with GBPAUD now 2.0225, while AUDUSD dipped below 0.6200, now 0.6245.
Arsenal, Newcastle and Liverpool all made it through to the semi-final of the league cup, the remaining place in the last four will be decided tonight as Spurs take on Man Utd. Putting Spurs recent victory over a fairly poor Southampton to one side, I find it very difficult to be confident that Spurs have any chance in this match
Next up in BoE who are widely expected to keep rates on hold at 4.75%. Dhingra, always dovish, is expected to be the only member to vote for a rate cut. It will be interesting to see if anyone else follows suit, but 8-1 is the expected vote. Even if Dhingra changes her view and votes for no change it is unlikely to cause any significant moves. BoEs Bailey has previously suggested we could see a full 1% rate cut through 2025, we’ll be watching for any confirmation of whether this is still a likely scenario.
After the BoE we will have US GDP along with some other reasonably key US data. Early tomorrow morning we’ll have UK retail sales and then more US data including the core PCE deflator, one of the Feds favourite indicators. I’m still looking forward to winding down but we can’t quite do this just yet.
Have a great day
- 12.00 BoE rate announcement
- 13.30 US GDP, PCE, philly fed survey, initial jobless claims
- 21.45 NZ trade balance
- 23.30 Japan CPI
- 01.15 PBoC rate announcement
- 07.00 UK retail sales
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