What to expect from tonight’s FOMC meeting

ollowing recent improvements in US economic data, particularly out of the labour market and inflation, and positive signs of progress in US-China trade talks, expectations for another rate cut from the Fed this month are very low. We think that rates are all but certain to be kept unchanged, with all eyes instead on comments from Chair Jerome Powell and the updated ‘dot plot’, which shows where rate-setters expect rates to be at the end of each year.

At the most recent meeting six weeks ago, Powell described the latest cut as ‘insurance’ against a blow up in trade tensions, with the bank’s statement removing the pledge to ‘act as appropriate’. The aforementioned improvements in domestic data ensures that this phrase will remain omitted, with Powell instead likely to continue stressing that policy is in a good place and suggesting that moves in either direction are not warranted at this time.

With the market already firmly of the view that interest rates are likely to be kept on hold in the short term, such comments from Powell are unlikely to materially shift the dollar today. The central bank has, however, been known to spring a few surprises now and again, so investors are remaining on their toes for now. In the meantime, we await this afternoon’s US inflation numbers for signs of any uptick in the critical price growth measure.

Pound falls after updated YouGov MRP model

There now remains just one day to go until Brits head to the polls in what’s shaping up to be one of the more critical general elections in recent memory.

The pound continues to remain at very lofty levels going into the vote, although the currency did lose ground yesterday evening following the release of an updated MRP model from YouGov. The model, which uses regional surveys to predict the outcome of each constituency, now suggests that Johnson’s Tory Party may only obtain a majority of 28 seats this week. While this would still mark a fairly comfortable margin of victory that would all but ensure a smooth and orderly Brexit by the end of January, it is much lower than the 68 majority the model had predicted a couple of weeks ago.

Sterling traders were not overly concerned by the report, with the UK currency now trading roughly where it was 24 hours ago. It does, however, go to show that the possibility of a hung parliament cannot be ruled out and that the outcome may end up a lot closer than analysts had recently predicted.

Euro rallies on surge higher in German sentiment

Tuesday’s ZEW economic sentiment data out of the Euro Area was much better-than-expected, providing reason to be optimistic that a recovery in the bloc’s economy may be forthcoming.

The economic sentiment index out of Germany leapt back into positive territory (10.7) for the first time since April and to its highest level since early-2018. According to ZEW President Professor Achim Wambach the move higher in the index ‘rests on the hope that German exports and private consumption will develop better than previously thought’. This, in our view, provides another clear sign that the bloc’s economy is not heading for a recession and is instead more likely than not to experience a gradual revival in 2020.

EUR/USD was clearly buoyed by the release, briefly moving back above the 1.11 level at one stage yesterday. Investors will now be gearing up for Thursday’s European Central Bank meeting. As mentioned yesterday, we expect new ECB chief Christine Lagarde to mostly stick to the existing script, talking up the need for fiscal stimulus and reiterating that policy could be eased further, if required.