Rising concern that the global economy is continuing to slow sharply, after profits warnings from FedEx and BMW as well as diminishing optimism about an imminent US, China trade deal saw US and European stocks fall back sharply yesterday, though US markets did pull back from their lows in the wake of an unexpectedly dovish statement from the Federal Reserve.
There was a great deal of speculation as to how the Federal Reserve would manage interest rate expectations for the remainder of the year in the lead up to yesterday’s meeting, with some suggesting that they wouldn’t be overly dovish so that they could retain some optionality when it came to rate policy for the rest of the year.
When you consider where we were at the beginning of the year amidst concerns about a possible policy mistake by the US central bank, the about turn in policy stance has been considerable, and yesterday’s 180% degree about turn since the start of the year saw the US dollar and US yields slide sharply. It’s not been a gradual change either, it’s been more of the screeching hand brake turn variety than a slow about turn, where we’ve gone from the prospect of three rate rises this year, to no rate rises at all and the balance sheet run off to end by September, in the space of ten weeks.
The Fed also downgraded its growth forecasts for this year, and for all of those who were holding out for one more rate rise this year, those rather remote expectations have also gone. If anything, markets should probably start pricing for when the Fed may have to start cutting rates, if they aren’t already starting to do so.
In UK news the pound came under pressure as the Brexit saga took another twist yesterday after President of the European Council Donald Tusk said that the UK could have a short extension to article 50, but only on the proviso that Theresa May’s withdrawal agreement gets passed by MPs at the third time of asking, otherwise it’s no deal.
It is slowly becoming apparent that patience is wearing thin amongst EU leaders, and it’s not hard to sympathise with that sentiment, but putting a gun to the heads of MPs here is probably not the best way to achieve a conclusion to this particular problem. Neither are threats from French politicians that they will veto a delay because they will be soon for what they are, which is hot air.
It is simply not credible for the French, given the problems with the gilet jaunes protests that they would take such a self-destructive action, not to mention they would also be throwing Ireland under the bus.
For now the ball is back in the UK’s court, and MPs in particular, though how they will react is anyone’s guess after Prime Minister May went on national TV last night and more or less laid down the law, by throwing them under the bus and blaming them for the current impasse, in a tactic that looks like it may well backfire, as she came under attack from all sides of the political divide, for pitching the deadlock as Parliament against the people.
All the while the clock continues to tick away, as today’s EU Council meeting gets under way when the remaining 27 EU leaders will start discussions on other possible extension variables, and the Prime Minister will also try to convince them to grant her an extension until the 30th June so that she can get her deal across the line at the third attempt.
This remains a big ask, with the DUP still not onside, and even more so after yesterday’s events, with the EU more or less holding a gun to MPs heads, to vote for a deal that everyone dislikes in equal measure.
In spite of yesterday’s melodramatics, the overall calculus remains the same, that of no deal remaining the default option, in the absence of any other action by MPs. That means short of passing the deal, getting a long extension, or revoking article 50, the UK will leave without a deal just over a week from now, with another rejection of the deal by MPs likely to up the stakes even further.
Against this backdrop the Bank of England meets today and it will be little surprise to anyone that they will leave monetary policy unchanged.
EURUSD – moved above the 50-day MA and on to the 1.1450 area, with the potential to head back to the 200-day MA at 1.1485, and 1.1520 behind that. Support should now come in at the 1.1360 area.
GBPUSD – appears to be on the cusp of slipping lower after failing to hold above 1.3300. could well slip back further towards the 1.3030 area where we have trend line support from the 1.2430 December lows. We also have support back down near the 1.3000 area and the 200-day MA.
EURGBP – has continued to edge higher, above the 0.8620 area, and could well move up to the 0.8670 area. Above 0.8670 suggests the potential for a move towards 0.8720. Pullbacks should find some buying interest around the 0.8580 area.
USDJPY – the inability to move through the 112.00 area has seen the US dollar drop sharply overnight, and having dropped below 110.80, we could well head lower towards the 109.80 level on a break below 110.20.
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