Thursday 19 July 2018

Daily Market Update: March FOMC minutes provide little significant new information as markets focus remain on Sterling


Last night saw the release of the minutes from FOMC’s March 15-16 meeting.

The minutes revealed that many Federal Reserve policy makers were warning of “appreciable” risks to the US economy from global developments at their latest meeting, as a deeply divided body of officials debated how soon to further increase short-term interest rates. While, as always, there were numerous opinions about the likely impact of a global slowdown on the US economy expressed in the minutes, the core message was one of caution. And given her tone in the March press conference and in her March 29th speech, Chair Yellen was likely among the several members who felt a cautious stance was prudent. Some market commentators are now of the opinion that the emphasise on downside risk to the US economy and long term inflation expectations stemming from overseas developments marks a key shift in the Fed’s rhetoric and that puts the Dollar at the front and centre of the Fed Chair policy thinking. The Dollar reaction to the minutes was relatively muted with the EURUSD finishing up 0.13% on the day at 1.1399, whilst GBPUSD was weaker, down 0.26% at 1.4123.

Sterling Weakness

The theme of Sterling weakness was prevalent yesterday as EURGBP traded 0.8100 for the first time since November 2014, the absence of any economic data didn’t provide any support for the struggling pound. The release of new polls yesterday on the June 23 EU referendum confirm that the vote is shaping up to be a neck-and-neck race. For Sterling today, there is only second tier economic data in the UK with the Halifax house prices and the Unit labour cost data. So Sterling trading today is likely to be driven by global events and by headlines on Brexit. The next major resistance levels in EURGBP sit around the 0.8160 level.

For the day ahead the main interest for the markets will likely be the ECB release of the account of their March meeting at 12:30pm. This will likely detail the discussion and debate that preceded the ECB’s announcement of an expanded QE program, new targeted lending facilities (TLTROs), and a deposit rate cut. But despite taking significant new action in March, ECB President Draghi surprised in his Q&A following the March 10th decision in his discussion of the prospects of a tiered deposit rate. While some economists in the financial markets have estimated that we may still be quite far from the lower bound, President Draghi noted that the ECB decided not to put a tiered deposit rate into place in part “for the purpose of not signalling that we can go as low as we want on this.” But just after discussing the complexities of a negative deposit rate, the President made it clear that “to the extent that we have other instruments to [reducing expectations for interest rates], we'll certainly shift the emphasis to other instruments.” Within the ECB Accounts, the market will be watching for the voracity of the debate on the negative deposit rate because, as the President noted, the ECB decided specifically not to signal that rates could go significantly lower from current levels.

The ECB president Mario Draghi also attends a meeting of Portuguese President Marcelo Rebelo de Sousa’s Council of State. Draghi will make a presentation about Europe’s economic and financial situation so watch the wires for any headlines later today.

In the US, Federal Reserve Bank Chair Janet Yellen joins a star studded central bank discussion with former Fed chiefs Ben Bernanke, Alan Greenspan and Paul Volcker in New York, the first time the four living Fed chairs have appeared together onstage in conversation at 9.30pm.

Finally the 2016 Masters Golf tournament begins today, with Jordan Spieth the returning champion one of the favourites to land the prestigious prize on Sunday evening.

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