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Fresh Brexit deadline and Fed rate cut move the markets

BoE’s turn in the spotlight

Following the focus on the US Federal Reserve yesterday, it is the Bank of England’s turn in the spotlight as Governor Mark Carney is set to announce the latest policy decision. The ONS reported that CPI inflation rose to 1.7% in August, which is well below the BoE’s 2% target, and caused the pound to fall. The sharp fall in inflationary growth since the 2.1% increase from July is the slowest rate since December 2016. Some analysts believe that the decreased pace of growth in the cost of living may increase the chances of a rate cut but it is widely expected that the BoE will keep rates unchanged at 0.75% due to Brexit uncertainty. While the decision may be anticipated by the market, the accompanying statement will be watched closely. In addition to any change of tone or hints at the central bank’s view on how prepared the UK is for Brexit, there is currently increased interest in who Governor Mark Carney’s successor may be when his term comes to an end on 31st January 2020. Chancellor Sajid Javid has come under increasing pressure to announce the new BoE chief as MPs fear any delay in making the appointment during a crucial time for the UK economy.

While the market awaits the BoE’s decision at noon, it isn’t the only factor weighing on the pound. A new deadline of 30th September for an amended departure proposal is being floated by the EU and backed by French President Macron and Antti Rinne, the PM of Finland. While some believe this makes a no-deal less likely as there is more time to work through the details, others fear that this is an opportunity for the European Council to reject the proposals ahead of the 17th October meeting. While the deadline has not yet been agreed by all EU countries, the fear is that if this proceeds and the EU rejects the amended proposals, it could increase the inevitability of a no-deal Brexit because it gives the EU the upper hand in negotiations and leaves Boris Johnson nowhere else to turn. Between the BoE and this latest Brexit development, sterling may be in some choppy waters until the picture becomes clearer.

US Fed cuts interest rate to 2%

Despite disagreements on the best way forward, the Fed announced a 0.25% rate cut which saw the US dollar make gains against its peers. The central bank also upgraded growth projections to 2.2% for 2019, up from the 2.1% forecast in June. The move was met with a mixed reception; the US President took to Twitter to complain once again about the actions of the Fed, and many were disappointed that there was no clarity on future policy decisions.

The rate cut was delivered in a 7-3 vote; the lack of unanimity and the fact that the accompanying commentary was not as dovish as markets had been hoping for meant that it wasn’t good news for the greenback. The yen rose against the US dollar after the Bank of Japan chose to hold interest rates and rebounded from a seven-week low. The euro also made 0.1% gains, although sterling had little response as investors awaited the BoE actions.

Disappointing data down under

Disappointing numbers from New Zealand and Australia, together with the wider geopolitical picture, have had an impact on both currencies. In Q2, the New Zealand economy grew by 0.5% quarter-on-quarter against a forecast of 0.4%. At the heart of the growth was an uptick for the service industry, which accounts for roughly two-thirds of the economy. Growth rose by 0.7% in Q2 in the service sector, but manufacturing and construction weight on goods producing industries, which fell by 0.2%. The release of the figures saw the kiwi move lower. In Australia, the key issue was the employment figures; employment increased by 34,700 in August against a 10,000 increase from the 41,100 seen in July. The report showed a net decrease of 15,500 people in full-time employment and an increase of 124,000 in part time employment. While the headline news was positive, the details proved too much for the Aussie, which dropped against the US dollar after the news.

The Australian dollar is already under pressure due to a range of factors, both domestic and global. The US Fed rate decision had an impact and saw the risk-sensitive Aussie lose out to sterling. Many believe that the current performance highlights the need for additional stimulus from the Reserve Bank of Australia but with so much uncertainty over global trade and domestic numbers missing forecast, it is difficult to predict how, and when, they may choose to act.

GBP: Choppy waters ahead with BoE announcement

GBP: Choppy waters ahead with BoE announcement

USD: Rate cut delivered by a split Fed

USD: Rate cut delivered by a split Fed

NZD: Kiwi loses out as growth slows

NZD: Kiwi loses out as growth slows

AUD: Employment numbers weigh on the Aussie

AUD: Employment numbers weigh on the Aussie

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