Fed Refuses to Ease as Much as Expected

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A less dovish Fed and the US repo market chaos continue to weigh on risk sentiment, short USD/JPY.

Rather than try to guide financial markets at this juncture, the US central bank punted for the sidelines last week.

Investors are not alone in struggling to plot a course for the future. Last week, members of the US Federal Reserve presented a variety of views about the economy and their expectations for the interest rate policy, reflecting the split among investors when asked about their outlooks.

There is plenty to debate when it comes to assessing an ageing economic cycle accompanied by trade friction. Last week’s brief spike in the price of oil also reminds us that the prospect of a greater risk premium in the crude market is the last thing big importers such as China, India, the eurozone and Japan need to see.

Such uncertainty about the macro environment along with doubts over the ability of central banks to stem a deeper contraction, or trigger a sustained pick-up in economic activity, has favoured a mix of growth/quality and defensive equities along with portfolio ballast of government bonds. Hence a world where government bond yields are low, while equities in broad terms, such as the S&P 500, are near record territory.

A median estimate among the 17 Federal Open Market Committee (FOMC) members indicated overnight interest rates are on hold for the rest of this year and for the entire of 2020.

In a challenging global environment, where plenty of debt held around the world is denominated in the US dollar, the bond market is expected to drop towards 1% by the end of 2020 for the FOMC’s overnight rate, from the current range of 1.75 to 2%. The Fed has set a higher bar for a further easing later this year and during 2020, but many in the bond market are playing a long game and will look at any near-term rebound in economic activity as temporary.


FOMC faces an impossible task setting a policy course given the macro economic uncertainty generated by trade friction between the US and China. An eventual deal will be fragile and replete with holes, limiting any market and business relief. Beyond China, a weaker euro may well prompt US tariffs from a White House that fails to appreciate the virtues of comparative advantage from trading with other countries.

Trade tension has been animating financial markets for some time and investors are well aware that any sign of weakening economic data stemming from faltering business confidence will prompt a stronger response from the central bank.


Our Picks
EUR/USD: Slightly bearish
This pair may drop towards 1.1970
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Hang Seng Index: Slightly bullish

Index may rise to 26620 this week.
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USD/JPY: Slightly bearish

This pair may drop towards 107 this week.
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XAU/USD: Slightly bearish

This pair may fall towards 1490 this week.
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