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Investors Keep Digesting The Fed Decision, BoE Explores Negative Rates

Sep. 18, 2020 3:56 AM ET
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  • EU and US indices traded in negative waters yesterday, perhaps as investors continued to digest the outcome of the FOMC gathering.
  • Remember that on Wednesday, the Committee kept its policy unchanged, but refrained from hinting at fresh stimulus as many may have expected.
  • Yesterday, it was the turn of the BoE announce its decision.
  • This Bank stood pat as well, but strengthened its language over the prospect of negative interest rates, noting that it is exploring their effectiveness.

Original source


The dollar traded lower against all the other G10 currencies on Thursday and during the Asian morning Friday. It underperformed the most against NZD, SEK, AUD and EUR in that order, while it lost the least ground versus GBP and JPY.

USD performance G10 currencies

The weakening of the dollar and the yen suggests that markets traded in a risk-on fashion yesterday. However, turning our gaze to the equity world we see that this was not the case. Major EU and US indices were a sea of red, with the financial and technology sectors being hit the most. That said, investors’ appetite improved during the Asian session today, with both Japan’s Nikkei 225 and China’s Shanghai Composite gaining 0.12% and 1.69% respectively.

Major global stock indices performance

It seems that equities continued sliding in the aftermath of a less dovish than expected Fed. Remember that on Wednesday, the Committee decided to keep interest rates unchanged within the 0-0.25% range, and although they said they remain ready to adjust their policy if economic conditions change, there were no hints over fresh stimulus in the foreseeable future, with Fed Chief Jerome Powell noting that the current policy stance remains appropriate. On top of that, the median dots of the new dot plot suggested that interest rates are likely to stay at current levels at least through 2023, but looking at the details, we see that four members were in favor of higher rates in 2023, despite the inflation forecast of the year staying only at 2%. This means that not all participants are willing to tolerate above-target inflation before they start raising interest rates.

As we noted yesterday, equities may continue to slide as investors digest the decision, or due to profit-taking after the steep rally in tech-related stocks. The absence of hints over fresh monetary stimulus, combined with the absence of any accord between the US government and the congress over new fiscal support, may keep equities pressured for a while more. However, the Fed’s readiness to do more if deemed necessary may keep any further losses limited. We stick to our guns that the extra-loose monetary policy around the globe, combined with positive headlines surrounding a potential vaccine, may eventually help equities to rebound, and keep the US dollar under selling interest.

Speaking about monetary policy, yesterday, we had a BoE decision. The Bank decided to keep its policy untouched via a unanimous vote, but noted that it is exploring how a negative bank rate could be implemented effectively. Officials also noted that the economy looks unusually uncertain and that the MPC will consider issues relating to Brexit within the context of its wider forecast discussions ahead of the November MPC meeting.

Cable slid around 100 pips at the time of the release as the Bank now appears to be talking more openly about negative rates. With the chances of any EU-UK trade deal before the October 15th deadline being very slim due to tensions between the two sides, investors may have now increased their bets that the Bank could proceed with pushing the cut button at one of its upcoming gatherings. Moving ahead, the rising probabilities of a no-deal Brexit at the end of the year and a potential rate cut into negative waters may keep the pound under selling interest.


The Nasdaq 100 cash index traded lower yesterday, but hit support near the 10935 zone and then it rebounded somewhat. The index is now trading below the medium-term upside support line drawn from the low of April 21st, but in order to get confident over stronger declines, we would like to see a decent dip below 10935. After all, the price also looks to be trading within a range between that barrier and the 11555 hurdle.

A decisive dip below 10935 would confirm a forthcoming lower low and may pave the way towards the low of July 31st, at 10715. If the bears do not stop there, another round of selling could set the stage for the 10515 barrier, marked by the lows of July 29th and 30th, where another break may see scope for extensions towards the low of July 24th, at around 10320.

On the upside, in order start examining the bullish case again, we would like to see a strong recovery above 11555. This would not only take the index back above the aforementioned upside line, but would also confirm a forthcoming higher high on both the 4-hour and daily charts. The bulls may then get encouraged to climb towards the 11845 obstacle, marked by the inside swing low of August 27th, the break of which could open the part towards the 12125 zone, defined as a support by an intraday swing low formed on September 1st.


EUR/GBP traded higher yesterday, after hitting support near the 0.9082 level, which is fractionally above the 50% Fibonacci retracement level of the September 3rd – 11th positive rally. In our view, the strong rebound from near that key support zone suggests that the latest decline may have just been a correction, which is now over. With all that technical signs in mind, we see decent chances for the pair to continue recovering its recently lost ground.

A strong move above yesterday’s high of 0.9170 would confirm a forthcoming higher high on the 4-hour chart and may extend the recovery towards Wednesday’s high, at around 0.9208. Another break, above 0.9208, may wake up more bulls, who in their turn may decide to push the battle towards Tuesday’s peak, at around 0.9258.

In order to start examining whether the bears have gained back the upper hand, we would like to see a drop back below 0.9082. Such a move would confirm a forthcoming lower low and could open the way towards the 0.9045 territory, which is marked as a support by the inside swing high of August 24th. If that barrier fails to halt the slide and breaks, the next target to be considered may be the psychological zone of 0.9000.


During the early EU morning, we already got the UK retail sales for August. Both the headline and core rates declined notably, but less than the forecasts suggested. In any case, the pound barely reacted to this release, with its traders staying focused on the prospect of negative rates by the BoE and the slim chances of a trade deal between the UK and the EU.

We get retail sales from Canada as well, but for July, while from the US, we have the preliminary UoM consumer sentiment index for September. Canada’s retails sales are also expected to have slowed notably, after skyrocketing in June, while the UoM index is expected to have increased to 75.0 from 74.1.

As for the speakers, we have two on today’s schedule: ECB Vice President Luis de Guindos and ECB Executive Board member Isabel Schnabel.


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