Morning Brief – Wednesday 26th

The Sterling continued to extend its consolidation through the European session yesterday. Once again, the US session looked upon our domestic pressure with less sanguine eyes, succumbing to political uncertainty amidst staunch Commons conflict and even intra-party disputes. Speaking once again later today in Washington, May could provide the market with hope for the other side of a trade deal: someone else to trade with! Sterling still sits within its medium-term channel and this afternoon’s speech has virtually zero probability of changing this, moreover, up and down side risks seem moderate and contained moving into the event. Italy continues to promise a running public deficit of 1.9% of GDP. This conviction continues to support Italian and Eurozone debt yields and is helping to curb Euro selling. However, the recipe for a 1.9% deficit still needs to be spelled out to markets to check that the actuaries carried the one! With a Federal Open Market Committee interest rate decision this afternoon, the Dollar remains bid. Futures markets price a 25bps hike this afternoon at a level above the 90th percentile, suggesting close attention will be paid to forward guidance and subsequent committee discussions as well as the all-important dot plot.

• GBP:   Prime Minister May joins the UN Security Council this afternoon, with important opportunities to discuss post Brexit trade.

• EUR:   With Italy behaving for now, traders’ thoughts continue to trade Euro stability against Dollar attraction.

• USD:   FOMC decision day: A hike is priced in completely, but markets get their first look at members’ expectations for 2021 monetary policy.

• EM:    Heads down, don’t make any noise! Emerging markets survive well on an important Dollar day.

Pound Sterling:

Speak, Don’t Dance:

Sterling is flat this morning, losing only a handful of basis points back to its counterparts. The move is unlikely to represent market positioning ahead of May’s discussions in New York this afternoon. Instead, the moderate aversion to the pound this morning is indicative of uncertainty following two consecutive days of rising yields and a pound that has gained cost to 1%. Moreover, the Pound, much as the Euro, faces a headwind as investors consider the alpha potential of Sterling when the greenback is soon to yield 2.25% neutral interest. May’s speech this afternoon is expected to have followed trade talks with President Trump. The two should meet together in New York today whilst the UN general assembly convenes. Balanced upside and downside risk encompasses the event, with price action constrained by the supposed and assumed inability to invoke or sign a trade deal during the Article 50 process.

The Euro:

Would the real Mario Draghi please stand up:

Monday brought great fortune to the Euro, spiking upon the most optimistic words that ECB president Mario Draghi has uttered in years. Speaking to the European Parliament in Brussels, the typically dovish Central Bank Governor signalled forwards to rising price inflation amidst a consistently tight labour market and strong economic growth. Traders immediately rushed into the new promise of the European single currency before being immediately doused with cold water by the President, who noted this development was still only consistent with a first rate hike at the end of summer 2019 and the end of the asset purchase programme this year. The Euro remains stable amidst consistent guidance remaining constrained below 1.18 against the Dollar.

The Dollar:

Rates Day:

The Dollar will be in centre stage during the latter half of the New York session this afternoon whilst the Federal Reserve publishes its latest interest rate decision. Markets priced in approximately 93% of a 25-basis point hike at market open this morning. With yields on a generic ten-year government notes rising by as much as 0.5% to trade at 3.08 at the time of writing, there is potential for considerable Dollar movement this afternoon. With such a high probability attributed to the event and with such explicit forward guidance from the US central bank, the fallout from the announcement is likely to be limited. What will move markets considerably is the fresh observation of the dot plot – the committee members’ anonymous expectations for the future path of monetary policy.

Emerging Markets:

Don’t look the Dollar Bull in the eye:

Emerging markets are enjoying the relief of a stable Dollar, however, could be in for a surprise should today’s US Federal reserve announcement heighten the probability for future monetary tightening. With the UN Security Council presently convened in New York at their global headquarters, emerging market currencies should also be wary of any unexpected movements in the United States’, and other security council members’, deviations from incumbent foreign policies. Deep breaths could be necessary for the Rand!

Discussion and Analysis by Charles Porter

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