Tuesday, June 18, 2019

Has the Fed finally seen enough to decide on lower interest rates?

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MORNING BRIEFING

Will more bearish figures coming from the US economy force the Fed to pull the trigger soon? This is the key question everyone is asking this morning, on the back of another negative surprise in US data yesterday. The Dollar Index was unfazed but weakness was seen versus the safe havens. The Euro comes front and center as Draghi speaks in Portugal, equities kicked off trading with little direction, while Gold seems to be picking up pace again.

The Dollar started the week unchanged on average but there was some interesting price action against the Euro and the
Japanese Yen. The US currency was able to extend its advance versus the rest of its major peers but gave up ground over the Japanese safe haven while the Euro was also able to tick higher. This came on the back of another piece of bearish data from the States, as the Empire Manufacturing index wildly missed its mark. The report printed in negative territory for the first time since October 2016, again highlighting the slowdown in several sectors of the domestic economy.

So is that enough to push the Fed to act as soon as possible with the evidence of an economy struggling to keep up pace mounting? Our opinion is that this bearish reading adds to the pile of domestic slowdown signs and it should force them to reassess their outlook. US Treasury yields reversed and started pointing lower again on the back of the printing and the key question remains: will Jerome Powell take note of this evidence and will he hint on cutting interest rates soon? We think he should and the price action in the Yen and Gold this morning is suggesting that market participants agree with us. That been said, we should keep our guard up because, regardless of what consensus thinks, the head of the Fed may avoid making any references towards rate cuts and this would cancel any bearish bias for the greenback against these assets.

Elsewhere, the Euro will be in focus today as Mario Draghi will be speaking to an audience during the ECB forum in Portugal. The head of the ECB will have to make some kind of reference to his plans to address the sluggish growth and the stubbornly low inflation in the Euro area and the Single currency will take its cue from his remarks. Prices seem to have found a near-term bottom around the 1.12 level but if Draghi goes into any kind of details in regards to additional easing this level may again come under pressure.

Meanwhile, Sterling was among the weakest currencies of the day yesterday with the currency losing the 1.26 mark to trade close to the 1.25 area. There’s a lot of speculation on whether the BoE should still be considering raising interest rates when Brexit is resolved amid an environment of other central banks discussing a fresh round of easing to support their domestic economies. Clearly, this is not the time for Carney to change policy but with investors contemplating on whether they should start pricing in lower rates in the future, the bias for the Pound points lower.

Gold came off its $1,335 lows and is now pushing to the upside again after the sudden miss in the US data yesterday. Treasury yields are moving lower following this bearish reading and Gold attempts to shine but its direction going forward depends on what the Dollar will do after the FOMC meeting. As such, a retest of the $1,355 highs may be in the cards but we believe that traders will likely hold back and wait for Jerome Powell’s remarks before committing to any longer-term positioning.

Equities ended the day marginally higher yesterday with little appetite to go on the offensive ahead of the FOMC meeting tomorrow. It is obvious that the takeaway from what the Fed has to say in regards to interest rates will be of paramount importance to stocks traders so we should expect some choppy price action going into the event. Futures in Europe and the US are pointing towards a flat opening bell today and we believe that the lack of direction will be theme in the market over the next 48 hours, barring a surprise in any geopolitical fronts.

MARKET EVENTS TO WATCH

  • Euro-Zone Consumer Price Index - 1pm
  • German ZEW Survey: Expectations - 1pm
  • Draghi speaks at Policy Panel in Portugal - 6pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research