BoE is Dovish – Will the Fed be as Well?

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Market Drivers for September 17 2014

UK employment BOE minutes

AU LEI at -0.1% vs. -0.1%

Nikkei -0.14% Europe 0.34%

Oil $94/bbl

Gold $1237/oz.

Europe and Asia:

AUD LEI -0.1% vs. -0.1%

GBP UK Employment -37K vs. -29K

GBP UK Boe Minutes 7-2

EUR EZ Final CPI 0.4% vs. 0.3%

North America:



Cable sold off session highs after the release of the BoE minutes revealed that the MPC was generally circumspect about the state of the UK economy and saw some risks to growth from both the Scottish referendum and the weakening of demand from the Eurozone.

The MPC voted 7-2 to keep rates on hold just as in July with Weale and McCafferty repeating their calls for a 25bp hike. The committee was unanimous on keeping QE levels on hold. Overall however the tone of the minutes was decidedly cautious as members expressed concern over geopolitical risks, forecasting that growth in Q4 could slow.

On the economic front UK employment figures continued to paint a robust picture of labor demand with jobless claims declining -37.2K versus -29.7K eyed while the unemployment rate dropped to 6.2% vs. 6.3% forecast. The average earnings index rose 0.6% vs. 0.5% anticipated which was better than the -0.1% the month prior but still woefully low. In short the BoE minutes concluded that there was insufficient price pressure to justify a rate hike and the data continues to support this conclusion.

Cable rose as high as 1.6340 ahead of the release but sold off below the 1.6300 figure in reaction to the news. The unit has one other major event risk this afternoon as markets focus on the FOMC statement and presser but after that all eyes will turn to Scotland as it goes to the polls for a historic referendum on independence.

For now the markets remain relatively complacent about the results as most traders expect the NO side to carry the day, However with polls still uncomfortably close the situation remains fluid and a YES vote could shock the pound for a quick multi hundred point loss.

In Europe the calendar was quiet with only the final CPI readings on the docket which came in a bit better at 0.4% vs. 0.3% eyed. One interesting note in tonight’s trade has been the slow but steady creep higher in the EUR/CHF pair which has breached the 1.2100 level. Tomorrow the SNB meets for its quarterly meeting and the prospect of negative interest announcement is high as Swiss authorities try to maintain the 1.2000 EURCHF peg. Given the sharp deterioration in the ZEW sentiment numbers it is becoming clear that Switzerland is facing growth pressures as the broader EZ economy slows and under such conditions the SNB policymakers are likely to do all they can to keep the franc from further appreciation.

In North America of course the focus will be on the FOMC meeting which promises to be the marquee event of the week. Yesterday’s leak by Jon Hilsenrath of the WSJ that the Fed is likely to keep “considerable time” language in the statement took some of the surprise out of the event (assuming he is accurate) but the market will still want to hear Ms. Yellen views on broader economy and prospects for tightening. The fact is that despite generally respectable growth price pressures in the US – much like in the rest of the Ango-Saxon economies – are virtually non-existent. This dynamic therefore provides the Fed with the opportunity to err on the side of caution and remain close to the zero bound longer than the market thinks.

If Ms. Yellen remains dovish the dollar could be in for steep selloff across the board with EUR/USD likely probing the 1.3000 level while USD/JPY testing 106.50 bids as the day proceeds.

Boris Schlossberg
Managing Director

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