29th November 2018 Market Update
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🇺🇸 USD – The Dollar had a rare off-day yesterday as the fears of bullish investors came to fruition as the Federal Reserve softened their tone around the pace of forthcoming interest rate increases. This was after Chairman Jerome Powell indicated that US interest rates were “just below the neutral level”, leading investors to believe that the rate hike cycle was nearing its end. This view is very different to the one we saw in October where the Fed indicated that rates still had a way higher to go. Now, this does appear to be putting a lot of onus on what are essentially five words of a lengthy speech to the Economic Club of New York, during which Powell otherwise indicated that the Fed continues to have a ‘solid’ outlook for the economy, low unemployment and inflation near two per cent. Luckily we don’t have to wait long to get some further clarity as the minutes from November’s Fed meeting are released later on today. To be clear, expectations are still high for a December rate hike (60%) while the forecast for 2019 is becoming increasingly muddied – at the moment a single rate hike in May seems the most likely outcome. Following the speech, EUR/USD and GBP/USD jumped by almost a cent, but this morning some significant Sterling weakness has seen some of those GBP/USD gains reverse (see below).
🇬🇧 GBP – At the same time Fed Chair Powell was giving his speech in New York yesterday, Governor Mark Carney was also providing an update from the Bank of England as to the likely outcomes of a ‘No Deal’ Brexit. To summarise, it was very much a case of doom and gloom from Carney as he indicated that a disorderly exit would cause GDP to drop by 8 per cent, house prices to fall 30 per cent, unemployment to increase to 7.5 per cent and most importantly in our eyes – Sterling to drop by 25 per cent. In addition, the BoE warned that a disorderly Brexit would be a bigger hit to the UK economy than the 2008 global financial crisis. Now we must clarify that these would be ‘worst case scenario’ outcomes and part of me suspect that Carney is jumping on the fear-wagon as a means of getting any proposed deal over the line. Either way, we would have expected Carney’s speech to have caused a large drop off in Sterling, but as we know – the FX markets are often as unpredictable as the weather and Sterling actually benefitted from the weaker Dollar, courtesy of Jerome Powell. One thing that does appear to be here to stay is ‘volatility’ as this morning we saw another downward swing in Sterling following comments by Theresa May who indicated that the UK should get ready for a no deal Brexit if the December 11th vote doesn’t go her way, as the scaremongering tactics continue. Her views were shared by none other than Chief EU negotiator Michel Barnier.
🇪🇺 EUR – EUR/USD saw a relatively large move upwards yesterday on the back of Powell’s remarks, but these gains appear to be limited longer term. Part of this has to do with the risks around the potential for the imposition of US auto tariffs against big auto manufacturing countries such as Germany and Japan. As such, with negotiations ongoing for a US – EU trade deal, the likely impact on the Euro is skewed towards the downside. Such a feeling was supported this morning as both German and Spanish CPI inflation numbers missed expectations meaning the larger move upwards yesterday in EUR/USD is being offset slightly. On the plus side, this morning also saw unemployment fall to a record low of 5% in Germany; in France Consumer Spending also beat expectations; while Economic sentiment in the Euro-area came in higher than expected in a mixed picture in terms of Euro-data. Looking ahead today we have speeches from Mario Draghi as well as data out of the US which could yet weaken EUR/USD back towards yesterday’s levels.
USD: Powell talks down the likelihood of several more interest rate increases in 2019; Dollar weakens significantly as a result;
GBP: Carney’s speech touting the dangers of a disorderly Brexit help build upon the scaremongering tactics of Theresa May; Sterling volatility continues;
EUR: Mixed data this morning helps to offset the large move upwards in EUR/USD yesterday, which was caused by the Fed’s dovish comments.
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