Fed keeps interest rates unchanged, offering perplexing view on US inflation

As widely expected, the Federal Reserve kept US interest rates unchangedfollowing its latest FOMC meeting. However, markets are left puzzled, as the central bankseemingly dialled back on some of the downbeat tone seen in recent months.

Fed Chair Jerome Powell said that lower US inflation is “transitory” and the world’s most important central bank is apparently in no rush to adjust interest rates, suggesting that investors who had been pricing in a US rate cut this year had their expectations misplaced.

Moving forward, US inflation readings over the coming monthswill be seen as atest of Powell’s view whether the low US inflation is indeed “transitory”, or whether structural factors are at play towards keeping price growth persistently low. Should the latter perspective become more evident, that could prompt the discussion to open up back again asto whether the Fed should adjust monetary policy, in order to achieve its two percent inflation target.

It’s interesting to note that, at the time of writing, the Fed Funds Futures rate still shows a higher than 50 percent chance of an interest rate cut by December. This implies that certain segments of the market are still holding out hope that the Fed’s previously-communicated dovishness will eventually push through, and an inflation-boosting US rate cut is still on the cards for 2019.

Can the Dollar Index climb back above 98?

As markets continue digesting the latest Fed commentary, the Dollar Index has climbed near 0.6 percent and is trading around the 97.6 level. Meanwhile, Asian currencies are mixed against the Greenback, even as Japanese and Chinese markets remain closed for the rest of the week.

Dollar investors will then turn their attention to Friday’s US non-farm payrolls report, where a number that exceeds market expectations of 190,000 jobs created last monthshould encourage the Dollar’s year-to-date bullish trend to remain intact.

While a higher NFP print implies that the jobs market in the United States and in turn, economic momentum should remain robust, the wider question that is now being asked on an ongoing basis is whether the strength in the labour market is translating into consumer spending.

Brent to test $71/bbl support line as Oil’s supply risks come to the fore

Brent futures have now fallen by more than three percent from its year-to-date high and is now trading below the $72/bbl mark, following a surprise jump in American crude inventories. The growing US stockpilesare a sign that OPEC+ producers still have their work cut out for them in rebalancing the global Oil markets, and may have to extend its production cuts programme going into the second half of 2019.

In addition to supply risks out of Iran, Libya and Venezuela, should the demand side hold up its end of the bargain, that could ensure that conditions are conducive for Oil prices to reverse recent losses, as the $71/bbl mark remains a key support level over the near-term.