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  • richard evans

Slightly dovish Fed keeps USD off its highs, attention turns to BoE

Good morning

It was difficult to get a clear sense of direction once again in the markets yesterday. USD weakened into yesterday afternoon on softer than expected ADP employment numbers, it then had a run higher before softer US PMI numbers pushed GBPUSD up from the lows of around 1.2095 up to 1.2165, before the pair slipped back ahead of the FOMC. EURUSD saw similar moves, trading down to 1.0525 before pushing up to 1.0570, then dropping back. The USD strength before the FOMC meeting came as the markets came to the conclusion Powell would likely leave the door open for further rates rises. Didn’t we know that already?

Anyway, the FOMC meeting came and went, no change in policy and only very minor changes in the wording of the statement. Powell was regarded as being a bit on the dovish side, confirming that while FOMC are committed to lowering inflation and can always raise rates if required, his stance was clearly a cautious one, suggesting there could be quite a high hurdle for any move higher. Mind you markets don’t see a Fed rate cut for almost a whole year. US equities pushed higher, USD weakened, with GBPUSD pushing up from 1.2100 to hit 1.2195 overnight, EURUSD moved from 1.0520 up to 1.0600. A sell-off in GBP since to 1.2165, while EUR holds around 1.2600, means GBPEUR is back to 1.1480, that move above 1.1500 didn’t last too long.

Aussie trade surplus was lower than expected overnight but AUD is still holding firm. AUDNZD is up at 1.0925, AUDUSD 0.6430 and GBPAUD has fallen from the 1.9200 area yesterday to 1.8915, the lowest level since late-Sept, more down to a combination of GBP weakness and AUD strength, RBNZ have been a bit on the dovish side, saying that after a run of weakfish data, they don’t see another rate rise and that rate cuts may come earlier than expected. That is still some time off mind you, into Q4 2024 perhaps.

In contrast, BoCs Macklem sounded on the hawkish side, saying the neutral rate is drifting higher and as such interest rates may need to move higher to prove restrictive enough to get inflation down. USDCAD is a little lower now at 1.3835 from a high near 1.3900 but I’d say this is more from the weaker USD than those comments. Still, one of the few major central banks talking of further rate rises for the moment. I wonder if those comments are a vague attempt at preventing further CAD weakness, given CAD was at pretty much its lowest level since Oct 2022.

Is Asia, USDJPY traded to 150.20 helped by the post-FOMC USD weakness although has recovered a little to 150.45. USDCNY once again fixed on a 7.17 handle although at 7.1797 it was the closest we have been to 7.18 for over two weeks. 14th Sept was the last time we fixed above 7.1800. Talk of a possible RRR cut by China in the coming days, bjt surely the bigger news is that Biden is scheduled to meet China President Xi later this month, plus there is some suggestion US and China will discuss control of nuclear weapons to prevent an arms race. I don’t think this means US and China will suddenly see eye to eye but talking is better than not talking.

BoE rate announcement today where no rate change is expected. Inflation hasn’t been coming down as quickly as the Bank would like but with a fairly gloomy economic situation and a decent fall in inflation expected as a result of the October gas price reset then now doesn’t seem the time to push rates higher. Mind you we know there are members in BoEs MPC who do look for a rate rise so it will be interesting to see how the voting goes, some think there could be three voters looking for a rate rise out of nine this time around. Assuming policy does remain unchanged, the vote split could be a key driver in the direction of GBP. A lowering of GDP forecasts is possible.

Until then we’ll be watching the weather, which is pretty horrid here and we didn’t see any of the violent wind and rain that many places have witnessed. Wherer some places have seen gusts of nearly 100mph, winds here are negligible. Jersey has been hit particularly hard, with hail stones up to 3 inches across being reported. Major incidents have been declared on the south coast, in particular Southampton and Isle of Wight. We’re expected to get some stronger winds this afternoon but still not on a par with the south. It’ll still be a miserable day mind you.

Stay dry.

- 08.55 German unemployment

- 11.00 ECBs Lane speaks

- 12.00 BoE rate announcement

- 12.30 BoE press conference

- 12.30 US initial jobless claims

- 14.00 US factory orders

- 00.30 AUS retail sales

- 01.45 China caixin services PMI

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