Fed Chair Jerome Powell all but promised a July rate cut in yesterday’s FOMC statement, reports Adam Button.
The Federal Reserve finally lived up to the market's dovish expectations as Chair Jerome Powell made the case for a July rate cut. It was the first aggressively dovish turn and the first dovish dissent in the era of the Powell Fed. Gold broke above $1,350 to hit a five-year high of $1,394 and silver broke above $15 to reach 15.40. The British pound was the top performer while the U.S. dollar lagged. The Bank of England’s decision is up next. Our Premium Insights gold long reached its final target of $1,380 (from $1,280 entry). Each of the three other existing USD Premium trades are at least 100 pips in the green.
Fed Makes a Statement
The market went from 'fairly certain' of a rate cut in July to entirely certain after the Fed removed patient from the statement and lowered the dot plot (see text below of the latest FOMC statement with a strikethrough comparison with the April statement).
The dots now show nearly half of the Fed anticipating two cuts this year. Powell pinned the shifts in language on rising uncertainty from trade and global growth along with weakening inflation. The market reacted by fully pricing in a July cut with a small chance of a 50-basis point cut. A second cut in September is 86% priced into the Fed funds futures market as well.
It was a historic Fed outcome as not only it signaled the first clear dovish shift in the Powell Fed era, but also had the first dovish dissent, with St Louis Fed's James Bullard voting for a rate cut.
The bond market was surprised by the outright turn and two-year Treasury note yields fell 13 basis points to a fresh cycle low of 1.73%. Ten-year yields were down 3 basis points in a slight signal that the Fed is catching up to the curve.
Given the fall in yields, the dollar decline was initially muted with roughly a 50-pip dips across the board. The modest decline at the start reflected the continuing larger role of equity flows as the S&P 500 gained again. It also reflects the Fed's assessment that global factors are the catalysts for cutting; a sign that other central banks won't be far behind.
The British pound has engineered a solid turnaround after finding support at 1.2500 on Tuesday to reach 1.2720. Rory Stewart was eliminated from the Conservative leadership race and now it's down to four candidates, one of whom will take on Boris Johnson in a runoff. That man will be decide in the final two Parliament votes of on Thursday. All the remaining candidates are polling behind Johnson within the party and there will be some pressure to concede. Any signs of a united front from Conservatives will give them a better chance of getting something through Parliament. If Hunt, Gove or Javid chooses to fight, it will signal more gridlock on the Brexit front.
As we move to the BoE decision next, governor Carney may choose to dial back his prior rhetoric that rate hikes could come faster than markets expect in the case of a smooth Brexit. If he decided to stick with a positive tone, the rally in GBP will continue. The Premium Insights remain long GBPUSD from 1.25920.
Adam Button is co-owner and managing director of ForexLive.com and a contributor at AshrafLaidi.com
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