Intraday Market Thoughts

Fed Waits, BoE Won't, PBOC Weighs

by Adam Button
Aug 2, 2018 10:52

USD is gaining across the board after the Chinese yuan hit fresh 14-month low on reports that Beijing will retaliate to reports that Trump propose 25% tariffs on all $200 billion of goods imported from China. The Fed held rates unchanged as expected and didn't change any of its guidance (more below), while the BoE prepares to deliver its 2nd rate hike after the Crisis (more below). EURGBP Premium long hit its final target for 130 pip gain.

توضيح صفقة "إذا، ثم" في فيديو المشتركين. قبل الفدرالي و بعد المركزي الإنجليزي

Fed: Come back next Month

There were only two notable changes in the FOMC statement, upgrading assessments of household spending and growth to 'strong' from solid.The market was looking for more and the US dollar edged lower but at the same time as the Fed statement, reports were confirming Trump will propose 25% tariffs on all $200 billion of goods imported from China. The market clearly doesn't believe that will come to pass but it's a risk.

In terms of economic data, ADP employment was upbeat at +219K versus 186K expected but construction spending fell 1.1% compared to +0.3% expected. ISM manufacturing was also a touch soft at 58.1 versus the 59.4 consensus.

Despite some weakness in stocks, Treasury yields moved higher. Two things helped to push them up. One is the BOJ's latest moves, which have pushed up the Japanese curve. The second was the Treasury's announcement that it will increase borrowing in the quarter ahead. US deficits aren't nearly as bad as some have made them out to be but supply certainly weighs on demand.

In emerging markets, the Turkish lira fell to an all-time low after the US government unveiled sanctions against two Turkish individuals in retaliation for the arrest of a US pastor. Relations between Turkey and the west are slowly unraveling as Erdogan asserts himself at home and abroad.

Domestically the economy is struggling badly. Since the start of 2015, USD/TRY has strengthened to 5.00 from 2.16.

BoE Plays Catch up

There is a 91% probability for a a 25 basis points rate hike to 0.75% from the Bank of England. Despite all the uncertainty from Brexit, the UK economy has recovered on all cylinders following harsh winter weather, which impacted retail sales and manufacturing. Yet, the economy remains about 20% weaker than pre-Brexit referendum.

All eyes will be on vote from the 9-member committee, with a 7-2 vote is the most likely outcome. A 6-3 vote to raise rates in favour of an increase interest rates would be GBP negative, while 8-1 or 9-0 would be good news for the currency. GBP could also be negatively affected on a downward revisions to GDP growth as inflation is expeccted to drop back towards its 2.0% target in less than one year. Finally, watch the Mark Carney's speech to begin 30 mins after the decision, for the usual delivery of cautious optimism from the gorvernor.

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BoE Gov Carney Speaks
Aug 02 11:30

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