US Fed gives no hint of a rate cut.
US stock markets moved lower and the US Dollar moved Higher following the US Federal Reserve’s statement Wednesday and Chairman Jerome Powell’s press conference. US President Trump was 24 hours earlier Tweeting the Fed needed to lower interest rates by 1% but the Fed took no notice of the President’s insistence on Rate cuts and kept its official benchmark rate unchanged at 2.5% and gave traders no reason to think a rate cut was on the Fed’s agenda any time soon.
Powell did say “On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent.” This was about as bearish as the Fed Chairman got and reminded traders US economic growth remained strong. Inflation is currently running at around 1.6% which is not strong enough for a rate increase but not weak enough for a cut either.
So why were stocks down and the US Dollar up? US stocks were lower because the next rate move at the Fed is still likely up and higher interest rates make strong company earnings more difficult to attain. I said earlier this week that it is my belief the stock market will do reasonably well until September / October when US economic data will demand a rate increase. The US Dollar was higher because any expectation of higher interest rates (in this case not going lower either) is going to give traders a reason to buy the US Dollar. Higher interest rates = a higher currency value which stems from more demand.
The Bank of England is next off the blocks today with its May statement.
Today will be an important day for the Pound with the Bank of England issuing its May policy statement and inflation report. Unlike many other Central Banks, the Bank of England at the same time releases the Minutes from the meeting and also who voted for a hike, on hold or rate cut decision. We generally get plenty of bang for our buck when the BOE release their statement and giving consideration to the fact I am long the Pound I am looking for an optimistic and hawkish statement from the BOE.
Sure, Brexit is still a concern, however, the UK economy is doing well, inflation doesn’t demand a rate increase but it’s not falling either and the economy remains strong compared to many other parts of Europe. My expectation is Mark Carney the BOE Governor will remind traders that Brexit still remains a major concern but this week’s uptick in Euro Area economic data is a positive sign and the UK is doing okay but not setting the world on fire.
The BOE will keep the official cash rate steady at 0.75%.
First quarter job numbers miss estimates in New Zealand.
The official unemployment rate actually fell to 4.2% from 4.3% but it was the loss of jobs in the first quarter that had traders selling the Kiwi Dollar again on Wednesday morning. First quarter job numbers were expected to show +0.5% but the Number printed a negative -0.2% giving investment banks and hedge funds another reason to sell off the Kiwi Dollar.
The weaker than expected job numbers come on the back of falling inflation and the RBNZ telling the market its next official rate move will likely be lower and not higher. Any rally on the Kiwi Dollar just like the Aussie will be seen as an opportunity to short both currencies against the Greenback.
Friday’s official US jobs number could put more downward pressure on US stocks.
With the Fed putting pay this morning to any suggestion it may cut rates in 2019 Friday’s official jobs number if it beats market estimates may give traders more reason to sell down stocks at current highs and put some cash back into fixed income, likely bonds. I have commented a number of times I believe the US 10 Year Treasury Yield will rise in coming months and as more positive US economic data hits the market, the higher the likelihood is traders will come to the conclusion inflation will ultimately rise and the next rate move at the Fed will be up in late 2019 or 2020. This will put more upward demand on the US Dollar.
The very unreliable but closely watched private ADP Employment report was released on Wednesday and whilst this is an unreliable private assessment number it showed 275,000 jobs were created in the month of April. If the official jobs number on Friday prints anything close to this you will see traders buying the US Dollar very quickly and US stock markets likely falling.
The Euro’s immediate fate lies in the Euro Zone CPI number on Friday.
There were some far better than expected GDP, unemployment and CPI numbers for three of the Euro Areas largest economies Italy, France and Germany this week. The Euro rallied strongly on the back of the surprise data numbers and if tomorrows Euro Area inflation figures also beat markets estimates the recent breach back higher on the Euro will continue.
Higher inflation in the Euro Area will likely be seen as a negative for Euro Area stock indexes as better inflation figures steps a Central Bank closer to raising interest rates which sends stocks lower and the currency higher.
Be humble, you could be wrong.
About the Author: Andrew Barnett
Andrew is a professional trader and successful investor who has a strong focus on education. He is a regular Sky News Money Channel Guest and one of Australia’s most awarded and respected financial experts and is regularly contacted by the Australian Media for the latest on what is happening with the Australian Dollar. Director at LTG GoldRock, Andrew Barnett, guides thousands of traders around the world in the live market on a daily basis, advising them on buy and sell directions, as well as trading his own personal account. Andrew, a regular keynote speaker at trading and wealth-creation events throughout the Asia Pacific region, is an authorized representative registered with the Australian Securities and Investment Commission (ASIC).
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