Ashraf Laidi | Jun 20, 2019 07:05AM ET
The Fed finally lived up to the market's dovish expectations as Powell made the case for cut in July. It was the first aggressively dovish turn and the first dovish dissent in the era of the Powell Fed. Gold broke above 1350 to hit a 5-year high of 1394 and silver broke 15.00 to reach 15.40. The pound was the top performer while the US dollar lagged. The BoE decision is up next.
The market went from 'fairly certain' of a rate cut in July to 'entirely certain' after the Fed removed the patient from the statement and lowered the dot plot. 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 bps 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 signalled 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 2-Year yields fell 13 basis points to a fresh cycle low at 1.73%. 10-Year yields were down 3 basis points in a slight signal that the Fed is catching up to the curve.
Given the falls in yields, the dollar decline was initially muted with roughly 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.
Cable 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 decided in the final two votes of MPs 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 GBP/USD from 1.25920
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