Fed To Remain Cautious Post-Brexit

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Image via Federal Reserve / Flickr

Fed To Wait For More Data

With only a handful of weeks having passed since Brexit and the first meaningful post-Brexit data only just starting to trickle in, the Fed are highly unlikely to be seen making any policy adjustments at this juncture in time. Nonetheless, this meeting will be closely watched by markets, and although there will be no press conference following the decision, or an update of FOMC forecasts, the accompanying statement will be carefully scrutinised by traders looking to gauge the likelihood of any rate move in the coming months.

Labour Market Picking Up But Trend Still Down

A spate of recent data recently has seen an increase in Hawkish market expectations, further supported by Hawkish comments from various Fed members which have translated into a stronger US Dollar over recent sessions.  Positive data has included strong Non-Manufacturing ISM, Retail Sales, Industrial & Manufacturing Production, Existing Home Sales and CPI (both headline and core). However, of particular note was the bumper June jobs report which assuaged fears for the slowing of the US labour market. However, despite this strong reading, the underlying trend in job growth remains down.

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Fed To Refrain From Giving Rate Hike Signal

For the most part the statement is expected to stay largely the same as last time around with very few changes expected as the Fed seeks to wait out US election uncertainty and chooses also to allow for more time and data to pass as it judges the impact of Brexit and associated risks on the domestic and global economy Considering these risks and the fact that many other G10 central banks are on the verge of easing (particularly the BOJ who meet just two days after the Fed) it seems reasonable to expect the Fed to refrain from signalling a rate hike in coming months and as such as fairly neutral statement seems the sensible approach this month. However, with financial markets performing so resiliently in the wake of Brexit (driven by growing expectations for global central bank easing), a reference to these global risks might be downplayed.

In terms of the Fed’s outlook then, again, not much is likely to be altered with the Fed still looking for continued improvement in the labour market, inflation to pick up over the median term and growth to be moderate.  In terms of gauging a potential date for a rates move if the Fed do indeed decide to raise rate this year, December seems to be the obvious candidate as by that point the Fed will have half a year’s worth of data to judge the impact of the UK’s Brexit decision on the domestic and global economies.

Further Information To Come Later In August

With no updated forecasts and no press conference following the decisions the Fed has only a very limited means of communication at this meeting and so greater insight into the Fed’s current thinking is likely to be found on August 17th when the July FOMC Meeting Minutes are released. Following the release of those minutes, we will also hear from Fed Chair Yellen when she speaks at this year’s Jackson Hole Symposium on August 26th.

Data Flash

Australian Q2 CPI was released overnight, and the headline YoY figure fell to 1% against 1.1% expected and 1.3% previously. Meanwhile, the RBA Trimmed Mean CPI YoY figure held steady at 1.7% vs. 1.5% expected. These figures, which came in line with expectations, show that domestic price pressures are still very subdued. However market pricing for an August RBA cut fell to 50% from 62% in response to the data.

UK Q2 GDP figures were released this morning with the YoY figure printing 2.2% against expectations of 2.1% and 2% prior. The QoQ figure also rose to 0.6% against 0.5% expected and 0.4% prior. Service sector contributed 0.37%, and Production 0.3% whilst Agriculture and Construction were both down on the month contributing -0.01% and -0.003% respectively to the QoQ change.

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With over 6 years’ experience analysing currency markets, James is now a well-known industry analyst focusing on price action trading and fundamental drivers. Beginning as a private retail trader, James developed a strong interest in understanding the fundamental aspect of the market before pursuing technical trading capabilities which he now uses to identify opportunities over a short-term horizon. Alongside his market experience, James is also IMC certified having achieved the qualification to help further his understanding not only of the markets but the industry as a whole. James has a strong interest in both fundamentals and technicals and uses both forms of analysis in generating and executing trade ideas, with trades generally lasting from a few hours to a few days.