September 19, 2024

“The Federal Reserve opted for the double-size 50bp cut yesterday, and triggered some extremely choppy trading. While the move itself was immediately dovish, the economic projections and Chair Powell’s language gave an upbeat view on the US economy and suggested that 50bp is not the new norm. The Bank of England, the Norges Bank, and the Bank of Japan are still to come this week.”

Sam Cornford – Head of Trading

USD

The market is still trying to make sense of what yesterday’s Federal Reserve decision means for FX, with the dollar initially weakening sharply before retracing the move and now retreating once again. As rate pricing had narrowly favoured ahead of the meeting, the FOMC opted for the supersized 50bp cut while also wholeheartedly endorsing the soft landing narrative – i.e. they expect a rates-induced recession to be averted as they proceed with cuts. A lot of effort was directed at making sure the move did not look panicked, and Powell was quick to reassure journalists at the press conference that it was a recalibration from a strong position, and that 50bps won’t necessarily be the pace going forward. The dot plot has pencilled in two further 25bp cuts this year, and a total of 100bp next year, before bringing the funds rate down to around 2.9% in 2026. The outlook for the labour market – the recent deterioration of which has become central to expectations for quicker cuts – was particularly optimistic. The Fed has had a knack for underestimating the rise in unemployment this year, and the projection for it to rise only to 4.4% (from 4.2% now) and to stay there over the forecast horizon is a huge expression of confidence in their ability to stabilise the softening in the macro data.

GBP

The Bank of England is unlikely to give too much away this afternoon and the aftermath of the Fed decision should dominate for the pound, which briefly hit a 30-month high last night. A rate cut would be a huge surprise to the market, which is currently pricing in an 85% chance that policymakers take a brief pause after easing policy for the first time in the cycle last month. The Bank of England is plainly not as privileged as the Fed when it comes to inflation, and the 5.6% services inflation figure released yesterday is almost certainly enough to keep the MPC on a cautious path. That may sound curious given the 2.2% headline print, but the issue is that is a temporary achievement driven by a downward correction in food and energy prices – it cannot stick until the underlying domestic pressures come into line too. There is no press conference, so the market move is going to rely on the vote split, which is likely to be telling about appetite for further cuts in Q4, and the policy statement forward guidance, where there is arguably likely to be fewer concrete signals, given the BoE’s tendency not to give much away.

NOK

The Norges Bank is widely expected to hold rates at 4.50% this morning. The krone’s extreme underperformance this year (down 4% vs EUR) has precluded a dovish turn from policymakers concerned about aggravating the upward impact of a weak currency on inflation in such a small and open economy. So while inflation has slowed to 2.6%, there have been continued promises to hold rates at current levels until next year. That will eventually have to change, and the Fed’s big move yesterday could speed this along, but a huge dovish step isn’t expected today.

EUR

The Fed and the BoE are currently the most important drivers for the euro, which followed the fall, rise, and eventual fall in the dollar since yesterday’s FOMC meeting. There are some ECB speakers today, however, with hawks Knot and Schnabel and known dove Panetta set to take to the podium. So far, officials have pushed back against the 30% market-implied probability of an October rate cut, something which could aid a move up to 1.12 if this is eventually priced out of the curve.

Markets

The choppy FX trade mirrored a volatile session for stocks, with the S&P 500 eventually ending 0.3% lower despite initially hitting another record high yesterday evening. The mood across markets is upbeat this morning, however, and Asian stocks were lifted ahead of the European open.

Main Economic Events (All Times CET)

3:30am: Australian Employment Change
10:00am: Norges Bank Rate Decision
1:00pm: Bank of England Rate Decision
2:30pm: US Unemployment Claims

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