Morning Commentary: Unanimity

Foreign Exchange - Morning Commentary
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Markets are mixed this morning and have been largely range bound as we enter a key 48-hour period of economic data and central bank meetings beginning with U.S. CPI this morning (see below) and the FOMC rate decision later today. Tomorrow brings the U.K. election which will most certainly create a volatile British pound regarding the expected Tory majority in Parliament and the future course of Brexit. In addition, new ECB President Christine Lagarde will chair her first ECB meeting; expectations are for no change in interest rates but with a dovish bias.

Market reaction to the Democrats in the House of Representatives coming to terms on a revised USMCA trade accord with the Trump Administration has continued to help improve the tone for many Latin American currencies. The Mexican peso has appreciated in six of the past seven trading sessions.  Additionally, markets continue to hope and anticipate a postponement of additional U.S. tariffs on Chinese exports set to take effect this Sunday; energy and commodity-linked currencies are outperforming today.

Today is the Federal Reserve rate decision at 11:00 am PST followed by Fed Chairman Powell’s press conference 30 minutes later. Today is a rare day in that not a single economist polled by Bloomberg expects the Fed to announce a change in interest rates today. Investors and traders will be focusing on the future Fed outlook as the Fed will update its rate forecast through 2022.

Looking out into Q1 and Q2, market expectations remain slightly biased toward the need for additional Fed rate cuts. Even with the likelihood of the USMCA passing Congress and a Phase 1 trade deal between the U.S. and China, the probability of a U.S. recession in 2020 remains near 29%. One year ago, when equities and interest rates were both crashing lower, the probability of a U.S. recession in the next 18 months was nearly 49%.
  • U.S. CPI for November came in slightly higher than expectations, but U.S. interest rates have shrugged off the headlines as interest rates are slightly lower on the session. CPI for November came in a tick higher than expectations at 0.3% bringing the YoY increase from 1.8% to 2.1%. Ex-food and energy met market expectations at 0.2% and 2.3%, respectively.
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