The US Federal Reserve shifted towards a dovish stance yesterday and asset markets applauded. Against the background of signs of slowing growth, intensifying trade tensions and growing “uncertainties” about the economic outlook, the Fed removed the previous “patient” stance and instead noted that “act as appropriate to sustain the expansion”. The bottom line is that the Fed is priming the market for easing as early as July, though the market had already primed itself by moving sharply in terms of pricing in rate cuts over recent weeks. The market is now pricing in three rate cuts this year and at least one next year, which seems reasonable.
Clearly there are a huge number of uncertainties ahead, making the Fed’s job particularly difficult and the picture could look quite different should the upcoming G20 meeting in Japan (28-29 June) deliver some form of trade agreement between the US and China. This would likely result in less need for Fed easing. As I have noted previously there are still a huge number of challenges and obstacles to any such agreement, suggesting that market hopes of an agreement stand a good risk of being dashed. Until then, risk assets will remain upbeat, with equity markets rallying in the wake of the Fed decision even as bond yields moved lower and gold prices reached a 5-year high.
The USD remains under pressure and took another blow in the wake of the FOMC meeting. The USD has now lost ground against almost all G10 currencies except GBP amid Brexit concerns over the last month. This has extended today and the currency looks set to remain under pressure in the short term as markets continue to price in Fed rate cuts. The tension between President Trump and Fed Chairman Powell is not doing the USD any good either. The USD index (DXY) is now threatening to break below its 200-day moving average (96.710) though this has proven to provide strong support in the past. A sustained break below this level could see the USD extend losses against major and many emerging market currencies.