Market News & Insights
21 September 2016

Can the Fed Convince Markets?

Focus continues to be on central bank action and through yesterday the JPY was in focus for currency markets ahead of last night’s BOJ meeting.  USDJPY was on hold through much of yesterday, holding sub 102.00. As we mentioned yesterday, the BOJ were expected to act overnight, but the impact on JPY was expected to be limited and markets were setting up to be disappointed. As it turned out, the BOJ’s action overnight did cause JPY to weaken some 1.3%, helping the Nikkei to overnight gains in excess of 2% but we are already seeing the JPY gain ground from the overnight lows as the BOJ’s actions are absorbed by markets, as one commentator put it, “the BOJ’s action is like rearranging deck chairs on the Titanic”.  For what it’s worth, the BOJ opted to expand its monetary policy base until inflation is stable above 2%, they scrapped the average maturity target on JGB holdings while introducing QQE with yield curve control, and said they could cut to further negative rates if needed. Once again we live in a drip fed market where bad news is good. An underperforming and fragile global environment which requires constant support from central banks, rallies on the promise of additional easing a central banks attempt to paper over the cracks.

Stocks in Europe traded steady through yesterday, holding Monday’s gains. The Euro had started the day on a firmer footing, with EURUSD pushing back above 1.1200 before running into selling as Europe opened for trading, before settling back around the 1.1150 through much of the night. Most of the flows around EURUSD are on real corporate demand, and there appears to be little in the way of major positioning around this evenings FOMC meeting, markets preferring to react to the news from the Fed rather than pre-position. EURGBP traded up to .8630 resistance as suggested yesterday, this held and we’ve seen some retracement back lower sub .8600 but for now the prospect of a “hard Brexit” continues to keep the pound under pressure.

GBPUSD bore the brunt of this pressure as GBP selling drove cable to support at 1.3000 highlighted in yesterday’s commentary, but the downside pressure was too great and the break below recent lows saw accelerated selling back sub 1.2950. For now pressure remains on the downside as we hold below 1.3000. We are a long long way from any resolution around Brexit, the August rally in optimism may well have just been a false dawn for sterling, and the reality is that while its business as usual for now in the UK, a long and tough road of negotiations is to follow.  EU officials suggesting yesterday there is zero chance the UK will clinch an exit deal that allows free market access and immigration curbs. This kind of rhetoric will continue to put downside pressure on GBP pairs. Public finance data due across the wires this morning are unlikely to provide any meaningful traction for GBP.

In the US everything is on hold ahead of this evenings FOMC statement, stocks traded marginally higher while the USD simply clawed back Monday’s losses to be more or less flat on the week. The weakening JPY overnight did help drive some demand for the greenback but once again that has also subsided and we returned to flat on the week for the USD index. It’s really all about the tone the Fed set this evening. Markets are not expecting a hike in rates, in fact there is less than a 20% probability priced in the Fed will act this evening and considering the Fed have not hiked rates with less than an 80% probability  since the early 90’s, any action is very unlikely. Their tone however can have just as big an impact and should we see a shift in either direction, hawkish or dovish, then we could be open to a significant reaction in USD pairs. As mentioned in yesterday’s commentary, the Fed need to convince markets they are ready and willing to hike rates, and the data needs to back this up, part 1 has an opportunity this evening.