Fed rate cut but not yet


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 committee 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 USD. It took last place among the major currencies.


As investors obsessed about the USD they all but ignored the euro. It was difficult for them to do otherwise, given the dearth of European data. France was the only contributor, confirming that gross domestic product expanded by 0.3% in the first quarter.

The euro kept to the middle of the major currency field. It required no effort to beat the retreating USD and the EUR eventually booked a daily gain of 0.8%.


A 3% rise in oil prices was helpful to the CAD but its two biggest drivers were the US Federal Reserve and the Canadian consumer price index data. Like the other major currencies, the Loonie only had to tread water to beat the Greenback, but its first boost came from a jump in inflation.  

The headline rate of inflation accelerated from 2.0% to 2.4%, blowing away analysts' 2.1% prediction. Prior to the news, investors had been reasonably confident that the Bank of Canada would lower its benchmark interest rate this year. With above-target inflation, however, the BoC might be inclined to hold back from a cut. The CAD is 1.2% higher on the day against the USD.


There is little chance of the Bank of England making any rate adjustments at today's meeting. Inflation is bang on target at 2.0% and the uncertainty surrounding Brexit ties the hands of the Monetary Policy Committee. That said, the general belief is that the bank will peddle a hawkish line in its statement, or at least make the point that the next rate move could be either up or down. Investors will not swallow the story and it is hard to find any economist predicting a rate hike. But the BoE feels an obligation to squash any assumption that a post-Brexit recession will force it to loosen policy.

The UK retail sales data this morning were not greatly helpful to the GBP but did it no real damage. For a second month sales excluding fuel were down by 0.3% while overall sales fell 0.5%, as forecast. Sterling had a relatively successful day, largely thanks to the Fed. It is 1.1% firmer against the USD.


This morning the Bank of Japan said it would keep monetary policy unchanged for another month. "The decision exposes Japan’s central bank to the risk of a stronger yen as traders start to price in a narrowing gap between Japanese and US rates". At his press conference governor Kuroda indicated that there would be no change to policy before spring next year, at the earliest.  

Today's Japanese economic statistic was the all industry activity index. It improved from -0.3% to +0.9% in April. The JPY is 0.6% higher on the day against the USD.

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