GBP/USD has been mixed initially on the back of a reasonably mixed outcome of the FOMC rate decision and statement where the “the stance of monetary policy remains accommodative” was removed and the dollar has moved lower as the market figures that the Fed is close to neutral already.
The expected 25bp rate hike by the Fed had been close to fully priced for at least a month anyway – The much bigger focus was on to what extent the recent hawkish shift among FOMC doves, evident in recent public commentary, would translate to projections for more rate hikes over the coming years – Today, that question has not really been answered but the dollar bulls were caught wrong-footed.
Prior to this meeting around, the median projections were for one further rate hike this year, and an additional three hikes next year – (78bp was priced by OIS forwards, compared with just 61bp at the beginning of the month).
Key takeaways from the statement:
- Sees one more rate hike this year, three in 2019 – hawkish.
- Sees faster econ. Growth this year, slightly faster growth next year in new economic projections compared with June projections.
- Sees slightly lower PCE inflation in 2019 compared with prior projections; projections for 2019 core PCE and 2019 unemployment rate unchanged.
- Does not change description of economy; repeats that jobs gains have been strong and household spending and business fixed investment have grown strongly.
- Repeats expects further gradual increases in fed funds rate will be consistent with sustained economic expansion, strong jobs market and inflation objective.
- Repeats risks to the economy appear ‘roughly balanced’.
- Sets interest rate paid on excess reserves at 2.20%, keeping it 5bps below top of Fed funds target range.
- Fed vote in favour of policy was unanimous.
New Federal Reserve forecasts Sept 26, 2018:
GDP:
- 2018 – 3.1% vs 2.8% prior
- 2019 – 2.5% vs 2.4% prior
- 2020 – 2.0% vs 2.0% prior
Unemployment rate:
- 2018 – 3.7% vs 3.6% prior
- 2019 – 3.5% vs 3.5% prior
- 2020 – 3.5% vs 3.5% prior
PCE inflation:
- 2018 – 2.1% vs 2.1% prior
- 2019 – 2.0% vs 2.1% prior
- 2020 – 2.1% vs 2.1% prior
The median projections are for one further rate hike this year and an additional three hikes next year – (That’s hawkish – Two hikes would have been considered dovish and an increased consensus on the need for 3 rate hikes next year could nonetheless bolster market pricing further – so we could see a pull back here).
The market now awaits the presser from Chair Powell:
Bill Diviney, Senior economist at ABN Amro explained that he expects Chair Powell in his press conference to temper any overly hawkish interpretation of the ‘dots’. “His most recent speech in Jackson Hole was actually somewhat dovish, expressing doubt over the usefulness of traditional policy guides like the NAIRU. Should he repeat such concerns, this would suggest caution will be needed from the Fed once we are at the FOMC’s median estimate of neutral (2.9%) – in the absence of significant inflationary pressure. Our base case is that the Fed will pause at this very level, i.e. once the target range for the fed funds rate reaches 2.75-3.00% by next June.”
Other things considered in the price
Recall that UK CPI was a big beat and that brought into question whether the BoE would need to consider hiking rates or not. The pair could have easily got to recent levels on the data but the bulls were out of luck on Brexit negativity. However, the news has been ever conflicting leading to a recovery and the pnd has also found some solace in recent M&A-related flow, explaining why GBP/USD was much closer to 1.32 than 1.30 – Comcast won the battle for Sky with a GBP 30.6bln bid over the weekend – (On Tuesday, Comcast crossed key 30 per cent Sky threshold after buying shares and Comcast says it now owns 36.95 pct of Sky).
Other things to watch this week
As analysts at ING notes, its just six months to go until the UK leaves the EU, and the question now is: does this latest impasse raise the risk of ‘no deal’?
All eyes on Conservative Brexiteers as Labour reiterates it’ll reject final deal – ING
- “It’s a light week for UK data, but keep an eye on consumer confidence on Friday. The sentiment is already weak, but it will be interesting to see if consumers are becoming more concerned in light of recent ‘no deal’ warnings. One of the reasons why the UK economy hasn’t fallen into recession since the Brexit vote is that employment has held up. But as the warnings about the practical, day-to-day risks get louder, there’s a risk workers begin to get more anxious about job security and personal finances. We, therefore, think there’s a risk the economy loses more momentum over the winter. Even now, confidence is flirting with multi-year lows, which is particularly stark when compared to the level of optimism in the US and elsewhere in Europe (even discounting the latest slip), both of which are near decade-plus highs.
- Having heard relatively little from Bank of England policymakers over recent weeks, we’ll hear from four speakers this week – including Governor Carney. While it’s always intriguing to see a sudden increase in Bank communication, we doubt policymakers will offer any fresh hints on rate hikes. Given the economic risks mentioned above, we think the Bank will find it tricky to lift rates again before Brexit, and we don’t expect another rate rise before May 2019 at the earliest.”
GBP/USD levels
On the upside, analysts at Commerzbank explained that if last week’s high at 1.3298 to be exceeded, the 1.3363 July high would be in focus. “A move above the 1.3363 July high would imply a deeper corrective phase to the 1.3473/1.3520 June high and 200 day moving average.” 1.3350 is a key target. The nearby range boundaries have been located at 1.3050-1.3220 now. The 23.6% fib of 16th April high to 14th Aug low is located at 1.3060 and the 61.8% of the recent 1.3290 high to same 14th Aug low comes in at 1.3053. The next possible key downside objective based on that same fibo range is the 50% retracement at 1.2978. The 21-D SMA is now at 1.3030. Thereafter, 1.2976/58 July low and August 3rd low guard 1.2930, (the double top highs of 21st August and 27th August).
Share
