IFX Market Report: Thursday 1st August 2019

Yesterday’s main news was the decision by the US Federal Reserve to reduce interest rates by 25bps, moving the range down to 2.0 -2.25%. The move was widely expected by the markets in the face of subdued inflation, economic growth concerns and the ongoing trade disputes with China. This cut was the first by the US since 2008 during the great financial crisis.

Investors listened intently to the accompanying statement by Fed Chairman Jerome Powell for clues on future announcements. Of particular significance were his comments about this cut not being the beginning of long series of rates cut, highlighting it was just a mid-cycle adjustment.

In the run up to the announcement the US dollar remained steady as some investors felt a 50bps was back on the cards after previously discounting the idea. However, the move to lower them by just 25bps and Powell’s comments dismissing the idea of systematic programme of rate cuts caused the dollar to strengthen later in the evening.

The US dollar index which tracks the dollar’s relative strength against a basket of 6 other currencies rose by 0.6% up to 98.631, a new 2 -year high.

The euro remained under pressure after Eurozone economic growth dropped in the 2nd quarter to 0.2% from 0.4% in the 1st quarter. The annualised figure fell to 1.1% from 1.2%, however this was marginally better than the 1.0% estimate. Data showed that Eurozone annual inflation remains tepid, Core CPI (YoY) fell more than expected to 0.9% in July from the previous reading of 1.1%. But on a brighter note, the Eurozone employment rate fell to 7.5% in June from 7.6% in May and is now the lowest it has been since July 2008.

Following the Fed’s decision to lower interest rates it is widely expected the European Central Bank will ease monetary policy at their September meeting. After leaving rates unchanged at their July meeting last week, markets will now begin to price in a rate cut which could leave the euro under pressure.

EURUSD held steady for most of yesterday’s session around 1.1135/45 but fell sharply in the evening following the Fed announcement to a 2-year low of 1.1058.

The pound enjoyed a day of gains for the first time in 4 days, but most analysts thought the move higher was temporary due to month end rebalancing. With the likelihood of a no-deal Brexit rising almost daily the pound has lost 4% against the dollar during July and finished the month down against the euro for a 3rd month in a row.

GBPUSD opened at 1.2168 and rose during the morning by nearly a cent to hit a high of 1.2245 and closed above 1.22 for the first time in 2-days. The gains were wiped out in the evening as the dollar strengthened, GBPUSD fell to a 28-month low of 1.2107 in the early hours of this morning.

GBPEUR opened at 1.0911 and rose throughout the day to hit a high of 1.1001.

Focus turns to the Bank of England interest rate decision and inflation report at midday today. Despite a slowing economy and Brexit concerns, the MPC aren’t expected to make any adjustments to monetary policy but Governor Mark Carney’s press conference could reveal clues on the central bank’s future moves.

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