- Fed decided to stick to their guns
- The dollar index is still holding on to its gain
- BOE is expected to increase the interest rate by twenty-five basis points
US futures are trading lower as investors weighing the new threats from Donald Trump. Trump administration has upped the game, it is considering to step up the pressure on Beijing by increasing the trade tariffs further on Chinese good to 25 percent from 10 percent. As we said before, Trump thinks that putting the gun to the head technique works but he is oblivious, this is China, not North Korea. The president wants China to come back to the negotiation table. Thus, the trade tensions are making investors risk-averse today while investors digest the Fed's interest rate decision.
Last night, the Fed decided to stick to their guns. The Fed is staying on course with two more rate hikes this year. The Fed members decided unanimously that they are going to leave the interest rate unchanged for now, something which was already communicated to the market. Hence, the dollar reaction wasn’t that enthusiastic but it still experienced some upward movement.
The dollar index is still holding on to its gain and this mainly due to the reason that the Fed sent one clear signal for investors yesterday that the borrowing cost is going higher. In other words, the idea of cheap money should be forgotten.
The reality is that the Fed cannot afford to remain reticent while the economic growth is firing on all cylinders. The Fed has also shown their confidence towards the economic outlook and they believe that the risk to the outlook is broadly balanced. So far, it is almost given that the Fed would increase the interest rate during their next meeting in September.
Yesterday's ADP Non-Farm Employment Change data has set a strong tone about the upcoming NFP number. The ADP reading confirmed a much better reading of 219K confirming a strong labour market condition in the private sector. The hawkish Fed stance and sturdy ADP reading have not provided enough tailwind for the dollar index to reclaim its previous high of $95.62 but the move certainly has the potential to push the index above the $95 mark again. A strong US NFP data tomorrow could provide further aid for the dollar index. The expectations are for 190K while the previous reading was at 213K.
Back in the U.K., it is the Bank of England’s turn to make a decision about their interest rate. It is widely expected that there will be smoke coming out of the Bank of England’s gun. Mark Carney, the governor of the Bank of England, is expected to increase the interest rate by twenty-five basis points to 0.75%.
It may not be a unanimous decision as we expect one rebellion to oppose this decision. The overall vote decision could be 8-1. What would drive the sterling higher or lower would be the bank’s outlook about the country’s GDP and inflation amidst the Brexit turmoil.
Having said this, we are talking about Mark Carney here and if he is known for anything, it is this that he has the ability to dodge the bullet. So even though, it is almost fully priced in that he would increase the interest rate today, but in all reality, he may actually hold the fire.
Nonetheless, the UK's economic data is telling a compelling story and it is evidently clear that the economic weakness in the Q1 was more of a temporary effect rather than an actual issue. Mr. Carney did say that half of his time is consumed in figuring out the Brexit. Surely, he would have to answer many questions on this and provide further clarity on the bank's current position about Brexit.
What Carney cannot afford to let it happen is the strength in the British currency, especially today- on the day of the interest rate decision. But we have seen this film way too many times and these central bankers are on top of their game when it comes to managing the currency expectations during such events. We believe that the Bank of England would strike a dovish tone in their statement and it would tame all the Sterling bulls out there.