Market Review - 19/09/2019 00:01GMT
Dollar ratchets higher after Fed's less-dovish cut
The greenback ended marginally higher against its peers on Wednesday after Federal Reserve's expected 25 basis point rate cut sent U.S. Treasury yields higher.
Reuters reported the U.S. Federal Reserve cut interest rates by a quarter of a percentage point for the second time this year on Wednesday in a widely expected move meant to sustain a decade-long economic expansion, but gave mixed signals about what may happen next.
The central bank also widened the gap between the interest it pays banks on excess reserves and the top of its policy rate range, a step taken to smooth out problems in money markets that prompted a market intervention by the New York Fed this week. In lowering the benchmark overnight lending rate to a range of 1.75% to 2.00% on a 7-3 vote, the Fed's policy-setting committee nodded to ongoing global risks and "weakened" business investment and exports.
Though the U.S. economy continues growing at a "moderate" rate and the labor market "remains strong," the Fed said in its policy statement that it was cutting rates "in light of the implications of global developments for the economic outlook as well as muted inflation pressures." With continued growth and strong hiring "the most likely outcomes," the Fed nevertheless cited "uncertainties" about the outlook and pledged to "act as appropriate" to sustain the expansion. New projections showed policymakers at the median expected rates to stay within the new range through 2020. However, in a sign of ongoing divisions within the Fed, seven of 17 policymakers projected one more quarter-point rate cut in 2019.
Five others, in contrast, see rates as needing to rise by the end of the year. The divisions were reflected in dissents that came from both hawks and doves. St. Louis President James Bullard wanted a half-point cut while Boston Fed President Eric Rosengren and Kansas City Fed President Esther George did not want a rate cut at all.
Versus the Japanese yen, although the greenback rose from session lows at 108.09 to 108.27 in Asian morning, price pared its gains and retreated to 108.15 at New York open, then to 108.11 in New York afternoon. Later, price rallied to an intra-day high at 108.47 after FOMC rate decision on rising U.S. treasury yields.
The single currency remained under pressure in Asia and dropped to 1.1037 in European morning, however, price then pared its losses and staged a rebound to 1.1068 in New York. Later, price tumbled to session lows at 1.1014 in New York afternoon on usd's broad-based strength.
The British pound also remained under pressure in Asia and dropped to +an intra-day low+ at 1.2439 in European morning due partly to cross-selling in sterling especially vs euro before staging a short-covering rebound to 1.2490 in New York morning. Cable later climbed to 1.2511 and then retreated in New York afternoon in post-FOMC trading.
In other news, Reuters reported the European Union's chief Brexit negotiator warned on Wednesday not to underestimate the consequences of any no-deal Brexit and said issues raised by Britain's exit from the EU would still need addressing before a future relationship could be agreed.
"I advise everyone not to underestimate the consequences, clearly for the United Kingdom first of all but also for us, of the absence of a deal," the European Union's chief Brexit negotiator Michel Barnier said on Wednesday. Barnier told lawmakers in European Parliament that a divorce deal, dealing with citizens rights and the Irish border, was a precursor to an agreement on a future economic relationship between Britain and the EU. "If the United Kingdom leaves without a deal, I want to remind you that all these questions will not just disappear... Some three years after the Brexit referendum we should not be pretending to negotiate."
On the data front, U.S. homebuilding surged to more than a 12-year high in August as both single- and multi-family housing construction increased, suggesting that lower mortgage rates were finally providing a boost to the struggling housing market.
Housing starts jumped 12.3% to a seasonally adjusted annual rate of 1.364 million units last month, the highest level since June 2007, the Commerce Department said on Wednesday. Data for July was revised to show homebuilding falling to a pace of 1.215 million units, instead of decreasing at a rate of 1.191 million units as previously reported. Economists polled by Reuters had forecast housing starts would advance to a pace of 1.250 million units in August. Building permits increased 7.7% to a rate of 1.419 million units in August, the highest level since May 2007. Housing starts rose 6.6% on a year-on-year basis in August.
Data to be released on Thursday:
New Zealand GDP, Australia employment change, unemployment rate, Japan all ind. activity index, interest rate decision, Swiss trade balance, exports, imports, SNB interest rate decision, Germany wholesale price index, EU current account, UK retail sales, retail sales ex-fuel, BOE MPC vote hike, BOE MPC vote unchanged, BOE MPC vote cut, BOE interest rate decision, BOE QE total, BOE QE corp bond purchases and U.S. current account, initial jobless claims, Philadelphia Fed's manufacturing survey, existing home sales, leading index.
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