Europe Looks To Softer Start Ahead Of FOMC

The lacklustre finish on Wall Street (except tech) has followed through into Europe, which points to a softer start ahead of the Fed’s rate decision.

FED 1

Inflation beats GBP Holds Steady
After yesterday’s very mixed employment data, inflation figures were slightly brighter, although that wasn’t necessarily obvious looking at the Pound’s nonchalant reaction.

UK inflation surprised to the upside +0.2% YoY in August, better than the 0% forecast but still a sharp decline from last month’s 1% increase. Core inflation increased 0.9% YoY well down from last months +1.8% rise but still significantly better than the decade low 0.6% increase forecast.

GBPUSD has shrugged off the upbeat data and continues to trade under US$1.29. (FXB, UDN, UUP

Fed in focus
The Federal Reserve are not expected to adjust monetary policy today. With no changes in monetary policy expected attention will be firmly on the updates staff economic projections (SEPs) and any further clarification on the shift in policy framework to Average Inflation Targeting. (AIT).

This is the first time that the Fed has convened since Jerome Powell announced that the Fed will allow inflation to run over the 2% target for extended periods of time to make up for long periods when inflation runs under the 2% target.

The dot plot
There is a good chance that the dot plot could be lowered to reflect that shift to AIT and the idea of lower rates for longer. This could drag on demand for the US Dollar, which has been under pressure this week heading towards the FOMC announcement. 

The prospect of lower rates for longer is a winner for non-yielding gold. A lowering of the dot plot could see the precious metal build on its almost 1% gains so far this week. $2000 is back as a clear target, a level last seen a month ago. US stocks could also push higher as lower rates are business friendly. (GLD)

US retail sales to remain strong?
Prior to the Fed, US retail sales will also be under the spotlight providing clues over the health of the consumer and their willingness to spend. Expectations are for US retail sales to increase +1.1% MoM in August, which would represent only a very slight slowdown from the +1.2% increase witnessed in July and would support the idea that the economic recovery in the US is continuing, albeit at a slightly slower rate.

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