FX market outlook

FX market outlook

Posted on Wednesday, January 30 2019 at 9:51 am UTC

Brexit stays in limbo; Fed decision eyed

  • Fed decides; Powell’s remarks on the balance sheet may be crucial
  • Pound slides as Brexit uncertainty seems set to remain elevated
  • US-China trade talks commence; plethora of earnings and data also due

FOMC meeting – emphasis on Powell’s balance sheet remarks

The main event today will be the Fed policy decision at 1900 GMT, which will be followed by a press conference from Chairman Powell – as will every meeting from now on. No change in policy is expected, and since there won’t be any updated forecasts either, market focus will fall almost entirely on Powell’s remarks. The Fed became sensitive to market concerns lately, with even the most hawkish of policymakers joining what seemed like a coordinated effort to signal that rate increases are on hold for now, while the Committee evaluates several risks.

Powell will likely echo this message today, reiterating that the Fed will be “patient”. More importantly, investors will look for any hints on whether the central bank is indeed thinking about halting the reduction of its balance sheet. This process can be seen as the reverse of QE, with the Fed shrinking its portfolio instead of expanding it. While chief Powell is unlikely to go as far as actually announce a pause in the portfolio unwinding, he could well hint this would be a sensible option if the economy slows further, which may in itself be enough to drag the dollar lower and propel stocks higher.

Sterling slides as Brexit stays in limbo; more uncertainty in store

The pound underperformed on Tuesday amid another hectic day in British politics that ultimately produced little of real substance. UK lawmakers approved the Brady amendment, which calls for the Irish backstop to be replaced with “alternative arrangements”, the definition of which remains unclear. In short, this provides Theresa May with a mandate to go back to the EU to renegotiate the backstop, with Parliament signaling that it could accept the overall deal if that part becomes more palatable.

Alas, taking a step back here, the EU has consistently denied any renegotiation on the backstop. Even if the bloc accepts to discuss the subject, it’s far from clear that it has any incentive to make concessions on the most delicate issue without the UK altering its own positions; that isn’t how such negotiations work. Not to mention that PM May will have a time window of a few weeks to secure legally-binding compromises that couldn’t be obtained in years. Hence, uncertainty is set to remain elevated, with a further correction lower in sterling not to be ruled out in the immediate term as headlines pointing to limited progress in the talks hit the wires.

Stocks look to pivotal trade talks and a flurry of earnings

US stock markets closed mixed yesterday, though futures tracking the major indices are pointing to a modestly higher open today, following encouraging earnings from Apple. It will be another packed day on the earnings front, with AT&T and Boeing announcing their results before the US market open. Microsoft, Facebook, and Tesla will release their own reports after Wall Street’s closing bell.

Separately, today marks the start of another round of pivotal trade negotiations between the US and China. These will be top-level talks, so any signals from the relevant officials could shape market sentiment. Forced technology transfer and intellectual property protection will likely dominate the agenda, as that is where the biggest disagreements lie.

Elsewhere, the aussie is outperforming today following stronger-than-expected inflation data out of Australia overnight, while gold is extending its latest gains, trading near $1315/ounce.

Coming up: Germany’s inflation and US ADP employment figures

Besides the Fed meeting, the trade talks, and the plethora of earnings, there’s also some key economic data on the schedule today. In Europe, Germany’s preliminary inflation figures for January will be in focus, while in the US, the ADP employment change comes ahead of Friday’s all-important payrolls numbers. US GDP data, originally scheduled for today, will be delayed owing to the government shutdown.