Wednesday, June 19, 2019

Has time come for the Fed to hint on lower rates or will Powell put on a brave face again?

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MORNING BRIEFING

All eyes will be on the Fed today with the FOMC meeting on monetary policy destined to dictate the price action on the Dollar and US equities for the coming weeks. The 2-day meeting commenced yesterday and tonight Jerome Powell’s press conference will shed some much needed light on what the US policymakers consider an appropriate way forward. The Dollar index goes into the meeting relatively stronger even though US yields declined below the 2.05% level yesterday, only to recover when President Trump tweeted that he will be meeting with the Chinese President during the G-20 gathering. Equities rallied on the back of the news and Gold eased its ascent.

The Fed has to decide what’s more important to them at this stage and signal whether they’re prepared to act accordingly. The debate revolves around the necessity of an easier monetary policy from the US central bank against a worsening domestic and global growth backdrop. There are voices saying that the US economy is still portraying positive growth metrics and there’s little reason to cut interest rates soon, given that there are no signs of an upcoming recession on the horizon. We have to agree with the “positive growth” argument as indeed the figures don’t indicate a negative rate but we also have to note that these positive figures are trending to the downside.

However, what’s more important and what will eventually make all the difference is what Jerome Powell and his colleagues think. There are two scenarios here: either Powell says something to indicate that lower interest rates should be expected or he sticks by his usual positive outlook. If the head of the Fed reiterates his view that “the economy is growing, employment is strong and inflation is stable” then this would mean that a July cut is off the table and the Dollar will resume its ascent. However, if he stresses that they have noticed the slowdown in some sectors of the economy and they’re ready to act to sustain its expansion amid a risky geopolitical environment then this means that they’re ready to pull the trigger and the Dollar will weaken immediately.

Meanwhile, the Euro lost more ground yesterday when Mario Draghi opened the door for more easing from the ECB. The Italian policymaker said that “if the outlook doesn’t improve, additional stimulus will be needed” which makes it clear that the ECB has seen enough evidence to decide to act soon. He didn’t go into any details on what they’re prepared to do but his comments were enough to drive the Euro below 1.12. Looking ahead, the shared currency’s price action today will depend on what Powell says in regards to the Fed’s plans but if he fails to hint on rate cuts, then the Euro will extend its losses towards the 1.1120 lows.

Gold was trending higher during the earlier hours of the day yesterday but a tweet from President Trump quickly turned the tables. The US President mentioned that he spoke with his Chinese counterpart and they agreed to meet during the G-20 gathering , which suggests efforts are being made to bridge the differences between the two countries. Prices are currently hovering around the $1,345 level and the short-term action will be decided by the Dollar’s flows post-FOMC. A break above $1,355 exposes the $1,360 area while a bullish Dollar reaction points towards the 1,330 area.

Equities ended the day with strong gains around the world on the back of Donald Trump’s tweet on China. Clearly, this was a positive development in the trade war saga and stock traders rejoiced when the news broke. However, today’s FOMC event may turn out to be more important, depending on whether the Fed opens the door for an easing cycle. Futures are pointing towards a flat opening bell with investors sitting on the sidelines in expectation of Powell’s remarks after the Fed meeting concludes.

MARKET EVENTS TO WATCH

  • UK Consumer Price Index - 12.30pm
  • FOMC Rate Decision - 10pm
  • Fed Chair Powell Holds Press Conference After FOMC Meeting - 10.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research