Fed Fallout & BoE Up Next
Fiona Cincotta September 17, 2020 7:40 AM
Upbeat Fed disappoints sticking to stimulus schedule, stocks sell off. BoE to pave way for further stimulus in November?
Fed, as expected kept interest rates on hold at near zero and pledged to keep them there until inflation rose significantly, through 2023. The central bank upwardly revised this year’s economic growth forecast, expecting GDP contraction of -3.7%, an improvement from -6.5%, however downwardly revised next years’ forecast to 4% growth from 5%. The Fed also sees unemployment at 7.6% by the end of the year, down from 9.3%.
The sour mood in the market carried over into Asia, shrugging off the Bank of Japan’s cautious optimism. European stocks are also pointing to a markedly weaker start as attention now turns to the BoE.
The BoE is not expected to adjust monetary policy. There is a good chance that they will highlight the growing downside risks facing the UK economy. With the Chancellor’s job retention scheme coming to an end next month, unemployment is set to almost double by the year end. Then there is the Brexit shock, with the UK so far heading for a hard, no trade deal Brexit and finally inflation is running at a 4 year low of just +0.2% in August. Given the dark clouds that are gathering on the horizon there is strong reason to believe that the BoE will pave the way for more stimulus in November.
The question is what type of stimulus? We know that Andrew Bailey finds QE a more useful tool, so that could be a safe bet. Of course, discussions surrounding negative interest rates continue to swirl as the BoE sits on the fence. Any hints that the central bank could bring negative rates into their tool box could send the Pound and financial stocks sharply lower.
Heading towards the BoE announcement the Pound is trading higher versus the Euro, thanks to some rare Brexit optimism, as Boris Johnson climbs down over internal markets bill and amid reports of tentative progress in informal Brexit talks. However, GBPUSD trades lower on US Dollar strength.
US jobless claims
Looking ahead, after the BoE attention will focus on US initial jobless claims which are expected to decline slightly to 850,000. Signs of the labour market stalling could drag on sentiment.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.