Fed fallout and BoE up next

Fed, as expected kept interest rates on hold at near zero and pledged to keep them there until inflation rose significantly. The central bank upwardly revised this year’s economic growth forecast, expecting GDP contraction of -3.7%, an improvement from -6.5%, however downwardly revised next years’ forecast to 4% growth from 5%. The Fed also sees unemployment at 7.6% by the end of the year, down from 9.3%. 

Stocks sold off and the US Dollar rose following the Fed’s announcement in and risk off move as the market portrayed its frustration at the Fed’s reluctance to offer any more stimulus. Whilst the Dow ended 0.1% higher the S&P and the Nasdaq dropped closing -0.4% and -1.2% lower respectively.  

The sour mood in the market carried over into Asia, shrugging off the Bank of Japan’s cautious optimism. European stocks are also pointing to a markedly weaker start as attention now turns to the BoE. 

BoE more stimulus coming (just not today) 

The BoE is not expected to adjust monetary policy. There is a good chance that they will highlight the growing downside risks facing the UK economy. With the Chancellor’s job retention scheme coming to an end next month, unemployment is set to almost double by the year end. Then there is the Brexit shock, with the UK so far heading for a hard, no trade deal Brexit and finally inflation is running at a 4 year low of just +0.2% in August. Given the dark clouds that are gathering on the horizon there is strong reason to believe that the BoE will pave the way for more stimulus in November.  

Negative rates? 

The question is what type of stimulus? We know that Andrew Bailey finds QE a more useful tool, so that could be a safe bet. Of course, discussions surrounding negative interest rates continue to swirl as the BoE sits on the fence. Any hints that the central bank could bring negative rates into their tool box could send the Pound and financial stocks sharply lower. 

Heading towards the BoE announcement the Pound is trading higher versus the Euro, thanks to some rare Brexit optimism, as Boris Johnson climbs down over internal markets bill and amid reports of tentative progress in informal Brexit talks. However, GBPUSD trades lower on US Dollar strength. 

US jobless claims 

Looking ahead, after the BoE attention will focus on US initial jobless claims which are expected to decline slightly to 850,000. Signs of the labour market stalling could drag on sentiment.  

FTSE Chart