The dollar reacted positively to yesterday’s rate cut from the Federal Open Market Committee, as the move was seen as hawkish when compared to very high market expectations for easing from the Fed. The Fed’s core forecasts of growth an expectation remain largely unchanged, as did its optimistic assessment of the economy. The most dovish FOMC members only saw rates falling by another 25 basis points, while OIS and Federal Funds futures markets are expecting more than 50 basis points of additional cuts. So in not validating the market’s expectations for cuts, the FOMC was hawkish at the margin. FOMC members were unusually divided: 7 members thought rates needed to fall further this year, while five thought rates were now too low. One member voted for 50 basis points of cuts at today’s meeting, while two voted to leave rates unchanged at this meeting. This week’s surge in overnight repo rates was viewed largely as a transitory, technical problem with technical solutions. In the Fed’s view, it was caused by corporate tax payments and other transitory factors – and therefore could be addressed with temporary liquidity provisions by the New York Fed. Powell did give a nod to the possible “organic” growth of the Fed’s balance sheet to allow USD reserves to grow but refused to speculate that outright asset purchases or QE would be necessary to bring reserves to an appropriate level. Today at 13:30 BST, the Philly Fed Manufacturing Index will be released, alongside the US Current Account.


A weak inflationary print was about as exciting as it got for sterling yesterday but the fall was predominantly due to base effects. A storming 0.8% MoM CPI print in August 2018 made this month’s YoY figure harder to reach the 2% target, a target it sizably missed after coming in at 1.7%. The usual political headlines are plentiful, with the UK media focussing on pictures of Boris being heckled again, this time in a hospital for there not being enough medical staff and that his visit was purely a media spectacle. Both of yesterday’s events, inflation readings and British politics, are pivotal for the Bank of England who unsurprisingly features in today’s event calendar. There will be no press conference for Governor Carney to speak at, but the Bank of England statement will likely include a reference to Brexit in the context of the UK’s economic progression. Just before the Bank of England takes the market’s focus, however, August’s retail sales figures are reported.


The euro was out of the limelight yesterday and gave way only slightly to the US dollar while the Federal Reserve cut interest rates by 25 basis points. The European Central Bank talkfest continued, with Vice President Luis De Guindos echoing outgoing President Mario Draghi’s calls for expansive fiscal policy to help raise inflation and rates in the Eurozone. Eurozone inflation figures for August were released and came in at 0.9% – practically unchanged since 2015. Today’s main euro release will be the Current Account, at 09:00 BST.


Yesterday could have been an eventful day for the loonie with both inflation data and the Federal Reserve on the calendar. A more hawkish FOMC meeting pushed the loonie to lows not seen since the beginning of the month. US yields still remain a far sight higher than Canada’s given only a 25bp hike by the Fed, but we argued yesterday that this may not have been the case if Chairman Powell cut rates by 50 basis points to quell the US dollar liquidity squeeze in money markets. Oil markets look to have stabilised around the $60 barrel a mark, with Brent and WTI currently sitting at $63.69 and $58.11 respectively.



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