In FX – All Eyes on Powell

Market Drivers June 19, 2019
The market waits for FOMC
UK CPI on line
Nikkei 1.72% Dax -0.05%
UST 10Y 2.06%
Oil $53/bbl
Gold $1342/oz.
10Y 2.08%

Europe and Asia:
GBP UK CPI 0.3% vs. 0.3%

North America:
CAD CPI 8:30
USD FOMC 14:00

Ahead of the FOMC meeting today the FX markets were quiet with majors tracing out narrow ranges as traders squared up for the event.

On the eco calendar, the data in Asia and Europe was thin, but UK CPI data printed slightly hotter than forecast at 1.7% for core versus 1.6% eyed giving cable a bit of a boost. Tomorrow’s BoE meeting is expected to be a non-event as UK central bankers will likely hold policy at current levels given the uncertainty surrounding Brexit, but today’s price data makes it clear the BoE monetary authorities may have less leeway in easing rates further given the fact that they are running hotter inflation numbers than the rest of the G-7.

On the Brexit front, Boris Johnson appears to have a commanding lead for the Tory leadership and although other rivals such as Stewart and Cove are talking about joining forces its unlikely that anyone else will be able to mount a credible challenge. While Mr. Johnson is a notoriously volatile politician he is viewed as a pragmatist by the market thus lessening chances of a hard Brexit. In addition, last night’s news that Labor party leader Jeremy Corbyn now unconditionally supports a second referendum should also be cable supportive, alleviating fears of a no deal Bexit.

After a near vertical climb for the past month and a half EURGBP has finally found some resistance at the .9000 level and yesterday’s reversal suggests that the pair may be due for a correction as the combination of more accommodative ECB and some stability on the Brexit front could push the cross back to .8800.

In North America today the marquee event of the week will be the FOMC presser at 1830 GMT. The event will be particularly scrutinized given the fact that President Trump has completely politicized the monetary policy process calling for the Fed to cut rates by 100 basis points and even looking into demoting the Fed Chief Powell to governor status. All eyes will be on Mr, Powell who will most certainly try to sidestep the political jabs aimed at him and reiterate the Fed’s focus on policy.

The markets are expecting an extremely dovish stance by the FOMC with futures having already priced in 3 rate cuts by 2020. That may be overly optimistic. We have long argued that the Fed is loath to initiate a full-scale easing program given the limited scope of rate cuts at its disposal. With Fed funds at 2.5% the Fed does not have a lot of room to operate and would prefer to utilize its arsenal only in times of true stress. That’s why Chairman Powell is more likely to offer only one immediate rate cut in July in order to appease the markets but could suggest that any further easing will occur only if conditions deteriorate rapidly. That in turn could spur a dollar rally given the skew in sentiment as shorts scurry to cover their bets pushing USDJPY through the 109.00 figure and driving EURUSD towards 1.1100 as the day proceeds.