Friday June 9, 2017 - 16:01:40 GMT
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British Election Stunner, Mixed Messages From Draghi, Fed Decision Awaited
John M. Bland, MBA
U.K. Votes Remain A Predictable Source Of Uncertainty In yet another important election, voters have come out again against the political establishment. While PM May ran a poor campaign, the underlying message of the electorate once again was one of dissatisfaction with the status quo. Politicians who do not recognize this reality are likely to have a difficult time at the polls. Once again, political pollsters were given another taste of humility. For now PM May is destined to rule from a weak minority government The Conservative s won 318 seats which was short of the 326 needed to hold an outright majority. Furthermore, May looks to be mortally wounded and is destined to be replaced as Conservative party leader. Odds are that will not happen immediately as the last thing the Tories need now is more leadership instability. This should keep the GBP at risk.
Fed Widely Expected To Raise Fed Funds Target On June 14 We indicated a week ago that I fully expect that the FOMC will take the opportunity next Wednesday to raise the Fed Funds target range to 1.00-1.25%. This will come even after the surprisingly weak May U.S. employment report a week ago. I still feel a 25bp hike is a sure bet. Fed Funds futures share my expectations as they are now running odds in excess of 90% in favor of such a move. As for an additional September tightening, we will just have to wait and see how the economy is performing at that time. My best guess is that the Fed would like to execute at least one more hike this year, if for no other reason than to give them room to ease policy in the future should the economy start to warrant monetary assistance once again. In addition to the rate hike, markets will be expecting some guidance about how the central bank plans to take steps to start to reduce its massive holdings of government securities. I assume the June 14 policy decision will have no significant impact on the markets as it should be already discounted.
ECB Keeps Policy Steady As Expected , But Once Again Draghi Sends Mixed Messages Last Thursday, the ECB kept interest rates steady. Furthermore its asset purchase program volumes were kept steady at EUR 60bln per month. Some in the markets were hoping for word on when QE would next be tapered down further, but that information was not forthcoming. There were two major headlines from the meeting. First, the ECB raised its assessment of the economic growth outlook to “broadly balanced”, from “tilted to the downside” previously. Secondly, It removed its easing bias in its forward guidance on interest rates. Market observers had not been weighing any risk of an easing of ECB policy. This was taken as a constructive statement on the economy.
What did grab the attention of the markets was new ECB inflation forecasts (HiCP) which were reduced to 1.5% for 2017 (vs. 1.7%), 1.3% in 2018 (vs.1.6%) and 1.6% in 2019 (from 1.7%). President Draghi admitted that these measures are heavily influenced by volatile petroleum and food prices. With monetary policy typically geared to longer term economic trends, it struck me as odd that the ECB is playing a close attention to such volatile factors that it cannot control. Based on the tone of his comments, its hard to see how President Draghi can consider a policy tightening in the near term.
Amazing Trader EVENT RISK Calendar:
Tue 13 Jun
08:30 GB- Inflation
09:00 DE- ZEW Survey
Wed 14 Jun
08:30 GB- Employment
12:30 US- Retail Sales
12:30 US- CPI
14:30 US- EIA Crude
18:00 US- Fed Decision + Presser
Thu 15 Jun
01:30 AU- Employment
08:30 GB- Retail Sales
11:00 GB- Bank Of England Decision
Fri 16 Jun
03:00 JP- Bank Of Japan Decision
12:30 CA- Retail Sales
12:30 US- Housing Starts/Permits
14:00 US- University of Michigan
Be sure to refer daily Global-View to see the continuously UPDATED Economic Calendar and the Forex Forum for the complete list of key items (actual data, selected charts, etc.) as they are released.
John M. Bland co-founding partner www.global-view.com
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