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Impatient Fed

Sell the rumour, sell the fact

There can have been few in the financial world who did not expect dovish talk from the Federal Reserve yesterday, if not an actual rate cut. That is exactly what they got. However, instead of the usual sell-the-mystery-buy-the-history price action, the dollar lost ground ahead of the announcement and weakened further afterwards. 

The BBC is naïve to make the link "US Fed opens door to interest rate cut after Trump criticism" but the US president will probably see his threat to demote the chairman as forcing Jerome Powell to take rates lower. In the real world, though, it is an economically damaging trade war that worries the Federal Open Market Committee. It voted 9-1 to keep the Funds rate target unchanged at 2.25-2.5%. For now.

Almost half the FOMC participants (not just the voting members) foresee one or two rate cuts before the end of the year. So it was a bad day for the US dollar. Ahead of the announcement it lost three quarters of a cent to sterling and afterwards gave up another half, for a daily loss of 1.0% that put it in last place among the major currencies.

Different strokes

Traditionally, Fed monetary policy shapes the thinking at other major central banks. That pattern will be put to the test today. Although the Reserve Bank of Australia is inclined towards another cut, the Norges Bank could well hike and the Bank of England is said to be leaning in that direction too.

Inflation data yesterday put the UK on target at 2.0% while Canada jumped from 2.0% to 2.4%. The most recent figures from Norway put inflation at 2.5%. It will be three weeks until the Bank of Canada makes its next rate announcement but Norges Bank and the Old Lady are in the frame today. Oslo is expected to tighten by 25 basis points to 1.25%. The Bank of England is likely to keep Bank Rate at 0.75% while hinting at future tightening, unlikely as that might sound.

In Australia this morning Reserve Bank of Australia governor Philip Lowe used a double negative to indicate another cut: "It is not unrealistic to expect a further reduction in the cash rate". The Aussie is consequently just a couple of steps ahead of the US dollar while the krone and the Loonie share first spot with the Swiss franc.

Retail sales and PMIs

Ahead of the Bank of England announcement UK retail sales are forecast to have fallen 0.5% in May after stagnating in April. The monthly round of provisional purchasing managers' index readings comes tomorrow along with UK public sector borrowing and Canadian retail sales.

For sterling the two key events will be the final winnowing of prime ministerial candidates in Westminster and a speech this evening by the Bank of England governor. One or the other could make life interesting for sterling, but probably not.

In the background, the Brexit clock is still ticking and uncertainty reigns. It is difficult to see any real upside potential for the pound.

GBP: Semi-hawkish talk likely

GBP: Semi-hawkish talk likely

USD: Rate cut(s) in the wind

USD: Rate cut(s) in the wind

AUD: Ditto

AUD: Ditto

NOK: Rate hike likely

NOK: Rate hike likely

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