Markets take a breather, with eyes turning to the Fed

Markets are in consolidation mode following yesterday’s sharp gains. With the Fed rate decision up ahead, volatility looks likely to return. 

• European markets pause after yesterday’s gains

• UK inflation fails to bring down the pound despite drop

• FOMC decision crucial for proving Fed independence

European markets are taking a breather in the wake of yesterday’s huge gains across the globe. A mix of dovish sentiment from Mario Draghi, coupled with sharply lower ZEW economic survey figures have shifted market expectations of a September from 39% to 62%. Meanwhile, plans for a fully-fledged extended meeting between the US and China at the G20 summit has sparked buying across a number of risk-on markets. Most notably, we have seen substantial gains for some of the most keenly-affected markets, such as the yuan, and base metals.

This morning has seen the focus shift on to the UK, with the release of inflation data building on the market sentiment in the wake of yesterday’s vote and debate. Ultimately little seems to have changed in the leadership battle, with Boris remaining the huge front-runner despite a somewhat lacklustre showing at the BBC. This morning’s inflation data highlighted easing inflation data, with both headline and core CPI ticking lower for the month of May. Ultimately while the downward trajectory of inflation would typically shift the focus towards a more dovish market outlook, the monetary policy side of things look pretty stable given the political uncertainty and on-target inflation reading.
With a sizeable upward revision to April PPI, and wages on the rise, there is reason to believe that there is underlying upward pressure on inflation despite falling energy prices.

Today’s FOMC rate decision is widely heralded as the most notable event of the week, with the recent decline in US data highlighting a shift towards another phase of easing. With Donald Trump making it clear that he could remove Jerome Powell in the event that he does not start easing, today’s rate decision with a clear test of Fed independence. Markets are currently pricing in a 22% chance of a rate cut, and while it is a possibility, the upcoming G20 meeting and Q2 GDP reading would make July a much more sensible time for the Fed to make a more informed decision.

Ahead of the open we expect the Dow Jones to open 9 points lower, at 26,457.