Yesterday, the Federal Reserve kept the benchmark rate between 2.25% and 2.50%, as expected. The central bank also stated that they feel comfortable with the policy that is currently in place and, for now, there is no need to move the interest rate in either direction. The recent round of trade talks between China and US have been quite productive. This is according to representatives from both sides. The Bank of England takes centre stage later on today.
Yesterday, as it was expected, the interest rates were held at the same level, between 2.25% and 2.50%. The Fed was quite happy with how things are progressing in the US economy, even though inflation is still on the lower side of their 2% target. It was pointed out that the expansion of the economic activity is still sustained, and unemployment is at its lows.
One thing that the Fed did lower was the interest on rate on excess reserves (IOER) – the money that the banks keep at the Federal Reserve. The IOER was seen climbing within the range of the benchmark rate and was sat at 2.40%. The Fed decided to lower that rate by 0.05%, bringing it to 2.35%. It is considered that, currently, banks are holding roughly around $1.5 trillion at the Federal Reserve.
Jerome Powell was seen quite relaxed talking about the state of the economy, yesterday, despite the constant pressure of lowering rates that he receives from President Trump. The President is trying to ramp up the public to put more pressure on the Fed, so that the rates would go down by at least 1%. Trump highlights that the key reason for such action is the lower inflation figure. Jerome Powell tries to stay very diplomatic around this pressuring which he receives from the White House, by saying that due to the absence of significant political changes, the policy will remain as it is, for now.
Before yesterday’s FOMC statement release, the probability of a rate cut by 25 bps in December was around 41.3% versus no-cut sitting at around 34.8%. This morning, the CME’s FedWatch Tool is showing that no-cut probability is at around 50.0%, against a 38% possibility of a 25 bps rate cut.
According to representatives from both sides, the recent round of trade talks has been seen as a productive one. China and the US have agreed partially on how to proceed with a few sets of tariffs that are taking effect right now. A few key notes to take from the negotiations are, that the US would remove a 10% tariff on the $200 billion worth of imports from China immediately after the deal goes into effect. Some other 10% tariffs would be lifted at the second stage, whereas the 25% tariffs on $50 billion Chinese goods could be revised after the US presidential elections in 2020.
China’s officials are now expected to visit Washington next week, with Liu He leading the delegation. The goal will be to try and finalize the deal, so that Xi Jinping and Donal Trump could put their signatures over it at their next meeting, with the date still up in the air.
The central bank torch will be passed to the Bank of England, which is also expected to stand pat. This will be one of the “bigger” meetings, where apart from the decision, the statement and the minutes, we also get the quarterly Inflation Report and a press conference by Governor Carney.
With all eyes turned to the Brexit landscape, the latest BoE policy meeting passed unnoticed. Policymakers kept interest rates unchanged at +0.75%, reiterating that an ongoing tightening at a gradual pace and to a limited extent would be appropriate. According to the minutes, they also maintained the view that whatever form Brexit takes, the policy response will not be automatic and could be in either direction. That said, with the EU granting a second extension to Article 50, which could last until October 31st, investors may be eager to find out whether officials still believe that an ongoing tightening is appropriate, or whether the delayed Brexit uncertainty will prompt them to abandon that view. According to the latest data of the BoE’s OIS forward curve, a hike is fully priced in for May 2022. It will also be interesting to see whether officials expect this uncertainty to leave more marks to the UK economy, and whether this has led them to revise downwards their economic projections.
Last week, after rebounding from the lower side of the range, which is between the 143.80 and 148.40 levels, GBP/JPY continued to grind higher this week. The pair managed to break above some of its key resistance areas but was recently held near the 145.70 barrier. In our view, there might be a chance to see a bit of retracement back down, but if the bulls are still feeling confident, the move lower could be seen as a temporary correction, before another leg of buying.
A move lower could bring the rate down to test the 145.00 hurdle again, marked near the high of April 24th. If the GBP/JPY struggles to fall below that hurdle, the bulls could take it as a good opportunity to step in and drive the pair back up again, aiming for the 145.70 barrier again. If this time that area surrenders to the bulls, a further push higher may lead the rate towards the 146.30 zone, or even the 147.00 level, which is marked near the highs of April 3rd and 15th.
Alternatively, if the rate falls below the 145.00 area, we will take a more cautious approach and stay neutral. In order to shift our near-term outlook to the downside, we would wait for a break below the 143.80 hurdle, which is the lower side of the aforementioned range. This way we could then target the 143.00 zone, a break of which might drag the pair towards the 142.50 area, marked by the low of February 19th.
From the beginning of this week, EUR/AUD keeps climbing higher, trading above its short-term upside support line taken from the low of April 19th. From the beginnig of January, the rate was below its downside resistance line drawn from the peak of January 2nd, which got broken on April 22nd, opening the door for the pair to some higher levels. Looking at the 4-hour chart, EUR/AUD could correct a bit lower, given that it is trading slightly below the key resistance, at 1.5959. But as long as the pair trades above the aforementioned upside line, we will remain positive, at least for a while.
A drop lower could force the pair to re-visit the 1.5930 obstacle, or even the 1.5896 support zone, marked by the low of May 1st. Not far from there runs the above-mentioned upside line, which could provide additional support. If the bulls see this as a good opportunity to step in again, EUR/AUD could make its way back to the recent key resistance areas, near the 1.5959 area, or even the 1.5989 barrier, marked by yesterday’s high. A further push higher may bring the rate to the 1.6020 level, which is the high of March 22nd.
On the other hand, a break below the aforementioned upside line could totally spook the bulls from the field, at least for a little while longer. But in order to get comfortable with lower areas, a break below the 1.5853 zone would be required. Such a move could clear the path for a further slide towards the 1.5805 hurdle, which marks the low of this week. The rate might stall there, or even retrace slightly back up. But if the bears are still feeling stronger, a drop below that hurdle may drag the pair towards the 1.5771 level, marked by the intraday swing low of April 22nd.
During the European morning, Eurozone’s final manufacturing PMI for April and Germany’s retail sales for March are due to be released. The bloc’s final manufacturing print is expected to confirm its preliminary estimate, while Germany’s retail sales are anticipated to have slid 0.5% mom in March after rising 0.9% in February. From the US, we get the Unit Labor Costs index for Q1 and factory orders for March.
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