Fed kicks off rate cut cycle with jumbo 50bps move

* Stocks and bonds choppy on Fed dot plots and Powell press conference

* Dollar finished very marginally in the green after out sized rate reduction

* Gold hits fresh record $2600 high before closing lower on the day

* BoE to skip September policy action as it awaits Autumn budget

FX: USD fell to levels last seen in July 2023, with the intraday low at 100.21 immediately after the initial 50bps cut announcement. Money markets had favoured a bigger rate move but consensus was heavily swayed towards a quarter point cut. But, the dollar was slowly bid up through Powell’s press conference and settled above key support at 100.61. It finished just about in positive territory on the day, after a 50bps rate reduction(!) Does that mean it was a hawkish cut? It was some turnaround as the FOMC very eagerly try to engineer a soft landing and avoid recession, just as it did in the mid-1990s under Alan Greenspan. Powell did push back against multiple 50bps moves and did little to signal concern on the economy while also stating he thinks the neutral rate is higher than it was.

EUR spiked up to 1.1189 before falling to the 21-day SMA at 1.1093 and eventually closing above 1.11. The recent top is 1.1201. The major was obviously driven by the dollar leg. Final eurozone August m/m inflation was revised marginally lower with the y/y measure unchanged at 2.2%.

GBP outperformed amid very choppy trading. A new high was posted at 1.3297, a level last seen in March 2022. Prices then turned lower though closed firmly in positive territory. UK CPI hit estimates though some components remain sticky. That dampened easing expectations for today’s BoE rate decision.

USD/JPY dipped to 140.44, just below the long-term Fib retracement level at 140.48. But prices bounced back strongly off this level which is proving strong support so far. This major is the main channel for dollar weakness due to its high correlation to US Treasury yields.

AUD spiked up to 0.6820 before closing near its lows, though up on the day. Focus turn to the jobs data with the headline forecast at 30k, a return to trend after several months of stronger-than-expected gains. The unemployment rate is expected to remain at 4.2%, as labour supply continues to outpace demand. USD/CAD tapped the 21-day SMA at 1.3543 before closing above the 200-day SMA at 1.3589. BoC officials are split on the balance of inflation risks.    

US Stocks finishedin the redafter a choppy day of price action. The S&P 500 lost 0.29% to settle at 5,697. The tech-dominated Nasdaq 100 lost 0.45% to finish at 19,344. The Dow closed 0.25% lower at 41,503. Both the Dow and S&P 500 again hit record intraday highs but turned lower. Utilities saw the steepest decline while energy and communication services were the only sectors in the green. Intel shares fell the most on the Dow and Nasdaq (-3.3%) on news of cost cutting causing a delay to building plants in East Germany.

Asian stocks: Futures are mixed. Asian stocks were rangebound in quiet trade ahead of the Fed meeting. The ASX 200 traded in a narrow range amid light newsflow. The Nikkei 225 was choppy mainly trading off yen currency volatility. A media report cited BoJ officials who are worried that a rate increase would cause a stronger JPY. That would mean cheaper imports, slowing inflation and hurting corporate earnings. The Shanghai Composite struggled initially on returning from its holiday break.

Gold popped up to $2600 before closing in the red. The price action in the precious metal inversely followed that of the dollar and Treasury yields. The 21-day SMA sits at $2523.

Day Ahead – Bank of England Meeting

The BoE are expected to keep rates at 5%. The vote split is likely to be 7-2 after the rare 5-4 split at the last decision. Since then, data has mostly confirmed the MPC’s stance. PMIs beat expectations in both July and August, while the labour market continued to improve. Although average weekly earnings continued to slow, they’ve been proving stickier than expected, with the y/y rate for July at an elevated 5.1%. What’s more, the headline CPI rebounded in July from 2% to 2.2%. Crucially for policymakers, core and services inflation remained stubbornly high, moving back up to 3.6% and 5.6% respectively. Q3 GDP is also seen positive even though there was zero growth on m/m basis for July.

Governor Bailey himself said at Jackson Hole that they are not in a rush to cut again, prompting markets to factor in a strong chance (now around 80%) for no action at this meeting. There are no new forecasts or press conference at this meeting so focus will be on any guidance and the Bank’s communication about their future plans.

Chart of the Day – GBP still relatively strong

UK money markets expect more or less another two quarter-point rate cuts at the November and December gatherings (45bps priced in for two meetings).  If policymakers maintain a no-rush mindset, the pound may extend its latest rebound. Bulls will eye up recent highs at 1.3261/66 and the top from yesterday at 1.3297, with the next level beyond that at 1.3330. Support sits around 1.3150.