Pound dives, JPY gains as BoJ stays pat

By Ipek Ozkardeskaya

The pound is dropped like a hot potato, as the likelihood of a no-deal Brexit becomes increasingly plausible. To many, it seems better to jumpship now, as things are about to get uglier as we approach the October 31st deadline. Cable looks set for a further sell-off toward the 1.20 hurdle against the US dollar and below. Decent offers are building near the 1.2380/1.2400 area.

From a market perspective, the worst is probably being priced in right now, as the UK is sitting between two chairs and one of the chairs is about to be removed. According to experts, neither the UK nor the EU is ready for a no-deal Brexit after more than three years of intense and fruitless talks. So, Boris Johnson and his government are decided to rip off the bandage as quickly as possible to halt the prolonged negotiation period, even if it means a further economic instability for the UK with multiple years, if not decades of bilateral trade negotiations with the EU countries and an immediate hit for Norther Ireland.

The FTSE, on the other hand, continues surfing on cheapening pound. British blue chips remain strongly in demand regardless of Brexit uncertainties. The FTSE 100 rallied 1.82% on Monday, while its European peers had a flat-to-negative session. The FTSE futures (+0.14%) hint at a positive open in London.

Fed to cut rates despite fine economic fundamentals

The Federal Reserve (Fed) meeting is what investors care about the most for the next two days. The Fed is expected to lower its interest rates by 25 basis points at this week’s FOMC meeting despite the solid economic data in the US. The Fed’s first rate cut in a decade comes at a moment when the GDP grows above 2%, the unemployment rate is at the lowest level in fifty years, the stock market is on fire with major US indices renewing record after record and the treasury bonds rally.

In theory, the US economy doesn’t necessarily need an easier monetary policy, but the Fed will point out the US – China trade war and slowing global demand to justify a 25-basis-point action, along with two or more rate cuts down the road. Investors slowly abandon the idea of a 50-basis-point cut at this meeting. The probability for the latter stands at a slim 20%.

US dollar is stronger ahead of the Fed decision, the US 10-year yield is steady near the 2.06% mark, as the US stock indices remain well bid near their record highs.

Today’s data could confirm a marginal slowdown in US personal income and spending in June, with 0.5% m-o-m increase in pending home sales versus 1.1% printed a month earlier. But the Conference Board consumer confidence, which reflects the sentiment of randomly picked 3000 households, may have improved to 125.0 during the same month, from 121.5 printed earlier. The economic data should not influence the Fed expectations at this point, but US-China trade talks could.

US and Chinese officials resume their two-day face-to-face meeting today in Shanghai. The probability of a wide-ranging deal between the two countries remains slim. On top, Hong Kong protests for which Chinese officials blame US’ ‘black hand’ and Beijing’s verbal intervention to restore order will likely not help. Anyhow, the expectations are so low that any positive news should be enough to boost hopes for a future deal.

Asian stock indices edge higher, with Shanghai Composite (+0.76%) ahead of its regional peers. 

BoJ doves demand more than empty talk, euro sideways

The Bank of Japan (BoJ) maintained its policy unchanged at today’s meeting but policymakers warned that they won’t hesitate to ease if there is a greater risk to their price target. Yen gained in the immediate aftermath of the BoJ statement, as investors in Japan demanded more support amid disappointing earnings season for Japanese exporters, slowing global demand, topped with rising trade tensions with South Korea. Moving forward, the BoJ will increasingly come under the pressure of the doves.

Elsewhere, the euro trades sideways a touch above the year-to-date support of 1.1100 ahead of the Fed decision. A less dovish statement from the FOMC could throw the single currency under the 1.11 mark. Due today, a series of data could point at a deteriorating business climate and industrial confidence in the Euro area in July and set the stage for a euro slide in the second half of this week. Indeed, US-China uncertainties combined with a worsening Brexit havoc understandably worry businesses. The consumer confidence on the other hand is seen at -6.6, slightly better than last month’s -7.2.

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