Good morning
For this week, US data releases will be one hour earlier at 12.30 or 14.00 london time due to the clock changes.
In addition, FX option expiries will be 14.00 london time, not the usual 15.00 london time.
Currency markets were reasonably quiet yesterday as we await the US Feds rate decision this evening. A rise of 75bps to take rates to 4% is anticipated, the main question will be whether Powell offers any indication as to the scale of future rate rises. The word ‘pivot’ is being widely used to describe the moment the Fed turns from its current sharp rising cycle to a slower pace of rate rises and potentially to a peak.
I think Powell will be cautious and leave his options open, the Fed are certainly not finished yet and although the Fed don’t like to surprise the markets I don’t think he’s ready to say ‘we’re only going to raise 50bps in Dec’. I think we’ll get more of the same message that inflation remains high, rates will remain higher for longer, Fed have more to do’, perhaps contrasted a little with some sort of ‘got our eyes on the economy for signs of weakness’. I’m never sure how much the Fed look at the level of USD but I wonder whether the size of the December move will partly hinge on the level of US Dollar against other majors. If EURUSD were to be above parity and GBPUSD nearer 1.2000 I wonder whether they would be more open to a 75bps rise in Dec. Lets get today over with first.
Risks of a hawkish of dovish Fed for me are pretty balanced. Despite the excitement in the build up to the announcement, I actually wouldn’t be surprised if currencies are at very similar levels tomorrow. We all know Fed have more rate rises to come, we all know they will be slowing those rate rises eventually, so unless we get any clear signal from Powell I see little reason for markets to change significantly. If pushed though I’d have to err on the side of the hawks and think USD stands more chance of gaining than weakening.
GBPUSD currently 1.1510 having traded a range yesterday of 1.1440-1.1565, I thin ki said yesterday anything above 1.1500 currently feels reasonably comfortable. EURUSD is at 0.9900, right in the middle of yesterdays 0.9850-0.9950 range. Parity remains close enough but we’ll likely need some dovish sentiment from Fed if we are to see a firm break above that area.
BoE undertook what some have called an historic milestone yesterday as they slowly started to reverse the quantitative easing they introduced back in 2009. They sold a small sum of government bonds, just £750m out of a total holding of nearly £850bn, a step in the right direction but could be considered more of an adjustment given the scale of the task at hand. BoE are expected to raise rates by 75bps tomorrow which I believe will be the largest rate rise since the turmoil of Black Wednesday back in 1992.
In Asia, some optimism noted that China may be looking to relax Covid restrictions, helping China stocks remain supported. We have already seen a very slight move on the length of quarantines, I still think any lifting of restrictions will be slow and in the meantime there are more reports of new lockdowns. On a more negative note, tensions between South and North Korea are on the rise, North Korea have been testing missiles more regularly recently, one landed in the sea just 37 miles from the South Korean city of Sokcho, South Korea launched three missiles in retaliation that landed a similar distance from North Korean shores. The North are unhappy with joint US/South Korea military drills they see as a provocation.
Elsewhere, BoJ minutes offered nothing really new, decent NZ employment data gave NZD some support to help AUDNZD stay below 1.1000.
That’s all for now, enjoy the day, it could well be quiet ahead of the FOMC.
- 08.55 German unemployment
- 12.15 US ADP employment
- 18.00 FOMC rate announcement
- 18.30 FOMC press conference
- 23.00 AUS S&P services PMI
- 01.30 AUS trade balance
- 02.45 China caixin services PMI
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