Fed in focus

The euro and sterling are marginally firmer against the dollar ahead of this week’s Fed meeting, trading at around $1.1110 and $1.3160 respectively, while EURGBP remains tightly range-bound as it continues to hover just below £0.8450. The outcome of the Fed’s two-day monetary policy meeting, which concludes on Wednesday, has plenty of potential to trigger volatility in markets. While a cut in interest rates from the current 5.25%-5.5%  is not in doubt – Fed Chair Powell has already said the “time has come” to lower rates – there is some uncertainty over whether it will be 25bps or 50bps, with the market putting the chances of the latter at around 40%. The Bank of England MPC also holds a policy meeting this week. This should be a more straightforward affair with rates expected to be left on hold (at 5%) on Thursday, though the market fully expects a 25bps cut at the following meeting in November.

US government bond yields ended lower on Friday with most of the decline seen at the short-end of the curve (2-year yields finished down around 6bps at just under 3.60%), while German and UK yields were flat to slightly lower on the day. Equity markets rounded off a generally positive week with further gains, of around 0.5% for both European and US stocks.

Comments by ECB President Christine Lagarde on Friday suggested the central bank’s next but one meeting in December is the most likely date for another rate cut. She noted that there is a lot of information and data available at the time of “(economic) projections exercises” – the next one is in December  – although she added that the Bank would “reassess” if there is a significant change to its current “baseline” forecast in the meantime.

There’s a heavy enough schedule of economic data this week. Euro area labour costs for Q2 are due this morning, with retail sales and industrial production in the US tomorrow (Tuesday) and CPI inflation and retail sales in the UK on Wednesday and Friday respectively. A large number of ECB members are due to speak over the course of the week also, including its Chief Economist, Philip Lane, today.