The US Federal Reserve left interest rates unchanged last week but signaled it still expects one more increase by the end of the year. The central bank also said it would begin in October to reduce its approximately $4.2 trillion in holdings of US Treasury bonds and mortgage-backed securities acquired in the years after the 2008 financial crisis.
In its policy statement, the Fed cited low unemployment, growth in business investment, and an economic expansion that has been moderate but durable this year as justifying it’s decision. It added that the near-term risks to the economic outlook remained “roughly balanced” but said it was “closely” watching inflation. Fed Chair Janet Yellen said in a press conference after the end of the meeting that the fall in inflation this year remained a mystery, adding that the central bank was ready to change the interest rate outlook if needed.
The US dollar initially strengthened against all-major G-7 counter parts, however the greenback has now given back a significant amount of post-FOMC gains, and this week should prove pivotal for the medium term directional bias in the greenback.
Speaking in Florence, Italy, British Prime Minister Theresa May proposed a two-year transitional implementation period for Brexit, during which access to the Single Market would continue and security arrangements will remain in place based on current terms.
The British pound appeared to dislike the British Prime Ministers speech, with the Pound falling against the euro and US dollar. Sterling tumbled back toward the 1.3500 handle, while the EURGBP pair moved back towards the 0.7890 technical level. Traders will this week decide the direction of the British pound, with the prospect of an October Bank of England rate hike, the GBPUSD may reclaim the 1.3600 handle, while the EURGBP pair looks ready to make a decisive break.
The Bank of Japan kept monetary policy steady and maintained an upbeat view of the Japanese economy, reiterating that a solid recovery will gradually accelerate inflation towards the BOJ’s two percent target, without additional stimulus. The main shock from last week came from new board member Goushi Kataoka, who dissented to the BOJ’s decision to maintain its interest rate targets. Kataoka reasoned that current monetary policy was insufficient to push inflation up to two, making the current vote eight-to-one against Mr Kataoka.
The USDJPY pair move higher after the Federal Reserve statement, but was largely unmoved after the Bank of Japan. This week the Japanese Yen may focus on more traditional themes, such as North Korea, stocks and Central Bank policy divergence.
The global ratings agency Standard and Poor’s downgraded China’s long-term sovereign credit rating by one notch on to A+ from AA- last week, citing increasing risks from the country’s rapid build-up of credit. “The downgrade reflects our assessment that a prolonged period of strong credit growth has increased China’s economic and financial risks,” S&P said in a statement, adding that the ratings outlook was stable.
The Australian dollar was hit hardest by the news, with the AUDUSD pair falling toward the $0.7900 cents level. The Australian dollar staged a slight recovery toward the end of last week, as the greenback shed gains.
The New Zealand dollar is in for more volatility this week following the election result where no clear majority was won by either of the main two parties.
The incumbent National party won the greater majority of the vote but the country’s mixed member proportional political system means they didn’t receive enough votes to win on their own so will now be forced into negotiations with a third party – NZ First. However, the Labour party with traditional support from the Green party, should they manage to swing support from NZ First party will be in a position to rule.
Kiwi-dollar buyers seem to prefer a clear result where the status quo of a National party ruling remains unchanged, as can be inferred by NZD/USD rise to six-week high last Thursday, following a poll which put the National party firmly ahead.
The German election result saw Angela Merkel succeed for a fourth term but extreme right wing AfD party shocked by gaining 13% of the vote. The euro may come under pressure after the Social Democrats pulled out of a coalition with Merkel’s Christian Democrats, making an effective government more difficult.
During the upcoming trading week, markets will look to the results of German and New Zealand elections, with both nations also featuring heavily in the high-impact economic calendar this week. Germany will release the results of its IFO survey and key unemployment data, whilst the RBNZ have a key interest rate decision. We also have key GDP figures from the UK and Canada, and durable goods orders from the United States.