Morning Commentary: Nothing to See Here

Foreign Exchange - Morning Commentary
Nothing to See Here
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The Fed will announce its latest rate decision at 11 am PST today in what should be a non-event.  It is widely expected that the central bank will keep its rate target range unchanged at 1.50%-1.75%.  As for the statement, it also should be generally unchanged with the description of the current situation tweaked.    

Through the combination of its statement and press conference, expect the Fed to reiterate that it is comfortable with its current policy stance.  The Fed should also note that it continues to “monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures, as it assesses the appropriate path of the target range for the federal funds rate.” 

At the last two meetings, Fed Chairman Powell indicated that a material reassessment of the outlook will be needed to change policy.  This is unlikely to change.  In a similar vein as prior meetings, Powell will likely continue to cite “sustained and persistent” inflation as a criteria that needs to be met for a hike.  With regards to cutting rates, expect Powell to reference the insurance cuts delivered last year that have created easy enough conditions to cushion any economic softness.  Given this, Powell should also note that they will use all tools needed to ensure the recovery is extended. 

Ultimately with the Fed expected to remain consistent in its messaging, expect interest rate and FX reactions to be relatively muted.
  • The coronavirus outbreak continues to weigh on the markets with the number of countries reporting cases and the number of cities being locked down continuing to rise.  While China has extended its holiday until February 2, Hong Kong re-opened today and its stock market fell sharply. 
  • UK home sales beat expectations, rising 0.5% MoM against expectations for a 0.2% rise.  The Bank of England meets tomorrow and the market implied probability for a rate cut currently sits around 46%.  While communications from the BoE signal the possibility of a cut, recent data and the expectation for fiscal stimulus argue for a dovish hold. 
  • Australia’s headline CPI data came in better than expected, printing 0.7% QoQ versus expectations for a 0.6% increase.  The increase in inflation was mainly driven by food prices.  While inflation beat market expectations, it still remains below the RBA’s forecast and well below the RBA’s medium term inflation target. 
  • President Trump is expected to sign USMCA into law.  Mexico has already ratified the agreement with Canada expected to do so shortly.
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