Macro-News round-up

🇺🇸 US: Yesterday, Jerome Powell, during his appearance, made clear what we have suspected for months: the rectification of his position to cut rates. Now, in Powell’s own words: “the inflation readings so far this year have not given us greater confidence”, “my confidence that inflation will come back down is lower than before”, and he added: “we do not expect it to be appropriate to cut rates until we have greater confidence that inflation will return to 2%”.

💼 Accommodative Measure: He also tried to be optimistic about the country’s economic outlook, acknowledging the good state of the labour market and the overall resilience of the economy. And of course, the usual nuance, if something goes wrong: “Policy is well positioned to deal with the risks and uncertainties we face.” As the only accommodative measure, to offset the frictions that could be generated in the market by the postponement of the rate cut, he announced a slowdown in the pace of the Fed’s balance sheet reduction, which is mainly what generates the most stress in the interbank markets: “The decision to slow the reduction will mitigate the possibility of tensions in the money market.”

🇯🇵 Japan: After U.S. Federal Reserve Chair Jay Powell’s news conference, Tokyo is rumoured to have interfered once more in the early Asian hours, probably to halt sudden swings in the yen. Japanese authorities have stated that the weak yen damages the economy by driving up import costs. They have also suggested that they could step in to prevent rapid changes and excessive currency hikes from driving up living expenses for people.

🇪🇺 Europe: Paradoxically, and as we also predicted, Europe is beginning to diverge from the Fed’s stance. Pablo Hernandez de Cos, member of the European Central Bank Council, expressed his optimism about European inflation getting closer to the target: “I am increasingly convinced that we are on the right track to reach 2% soon.” He also highlighted the effectiveness of the ECP’s monetary policies and assured that “Risks to the inflation outlook are now balanced.”

📈 Note: A Federal Reserve postponing until further notice its possible rate cut, together with a European Central Bank happily announcing that it is sticking to its rate cutting agenda, means a clear opportunity for future divergence in interest rates between the two economies to generate a bearish relationship in the EURUSD. Add to that, that the US economy is growing much faster than the European economy, and that US bonds pay almost twice as much as European bonds, and the flow of capital should inevitably flow into the dollar out of the euro, i.e. EURUSD bearish movement in the coming months. Longer timeframe charts show a correction that could lead beyond the lows seen in 2022, below the EURUSD parity.

🌐 Geopolitics: According to Bloomberg, the US and Saudi Arabia are very close to signing a historic agreement that would provide security guarantees to the kingdom and outline a potential diplomatic route with Israel in the event that its government ends the conflict in the Gaza Strip. Although there are many challenges ahead, the agreement would essentially be a reworking of the structure that was destroyed when Hamas attacked Israel on October 7th, sparking the Gaza crisis. A deal of this kind may completely alter the Middle East, enhancing the security of Israel and Saudi Arabia while fortifying US dominance over Iran and even China.

🛢️ Commodities: a tighter Federal Reserve, with a dollar that should tend to strengthen, coupled with a possible peace agreement in the Middle East, should keep crude oil and gold prices lower and more stable, with gold likely to move closer to the $2200 area, even dropping to $2050, and Brent oil which could cool down towards the $80-79.50 area.