Forexlive Americas FX – April 16 News Summary: Central Banker Comments on Policy Divergence.

The market was treated to comments from three key central bankers, including Powell of the Fed: the president of the ECB. Lagarde and Fed Governor Jefferson.

Fed Chairman Powell has changed his mind. He pointed out that despite the strong performance of the US economy, there has been a persistent slowdown.lack of progress on inflation this year, with recent data showing core PCE inflation expected to stabilize at around 2.8% for March. He noted that the labor market is moving towards better balance, showing its strength but with progressively moderate wage pressures. Despite this, the data did not boost confidence in controlling inflation.. Powell emphasized the Fed’s cautious approach, including not overreacting to last year’s decline in inflation. He said the restrictive monetary policy currently in force needs more time to demonstrate its full effects and stressed that this inflation scenario is not driven by overheated demand. The Fed aims to maintain the transparency and predictability of its policies, recognizing their global impact, and has learned from past supervisory deficiencies, ensuring a more forceful supervisory approach in the future.

Perhaps more important are the things Powell didn’t say. Specifically, before today, Powell said:

“If the economy generally performs as we expect, most FOMC participants believe it would likely be appropriate to begin lowering the policy rate at some point this year.”

This sentiment was not expressed today, leaving the door open to no reductions this year. Currently, there is only an 18% chance of a reduction in June, 43% in July and 69% in September. Remember that the Fed planned three more reductions by the end of the year.

Fed Governor Jefferson also spoke (voting member). He addressed concerns about continued inflation in a recent statement, saying that if inflation continues to exceed expectations, it may be necessary to maintain current restrictive monetary policy for an extended period. He noted that the economic outlook remains uncertain, with recent data showing both job creation and inflation rates exceeding forecasts. For example, headline PCE inflation was recorded at 2.7% over the past 12 months, with core PCE at 2.8%, according to Fed staff estimates. Despite significant progress in reducing inflation, Jefferson emphasized that the goal had not yet been fully achieved.

Jefferson’s basic expectation is that inflation will continue to fall with the current policy rate, while the labor market remains robust and economic forces continue to rebalance. He expects a slight slowdown in economic growth in the first quarter of 2024 compared to the final quarter of 2023, although retail sales data from February and March suggest the economy will remain strong.

Notably – and like Powell – Jefferson made no mention of policy easing in his latest remarks, contrasting with his previous statements in February when he suggested easing might be appropriate later in the year.

Unlike the members of the Fed, the President of the ECB, Christine Lagarde, indicated in an interview on CNBC that the The European Central Bank is preparing to reduce its interest rates soon, assuming there are no significant unexpected developments. She noted that geopolitical events have so far had minimal impact on commodity prices and that a disinflationary process is unfolding as expected by the ECB. While not committing to a specific rate cut path, Lagarde stressed the need to exercise caution due to ongoing uncertainties and stressed the importance of data in guiding the ECB’s decisions. She declined to comment on market expectations for three rate cuts in 2024, but expressed confidence that current restrictive rates are indeed having an impact on inflation.

Lagarde stressed that the path to the ECB’s 2% inflation target is expected to be uneven, with inflation rates likely to fluctuate. She highlighted a clear difference in consumer behavior between the US and EU, noting that European consumers are more cautious and tend to save more, while US consumers are more likely to spend. This difference is amplified by the higher fiscal support in the United States, aimed directly at consumers. In his comments, Lagarde emphasized that the ECB policies are independent of the Federal Reserve, focusing instead on exchange rates and the overall value of the currency. She concluded by reiterating the ECB’s commitment to maintaining price stability and achieving the 2% inflation target, while refusing to speculate on the possibility of EURUSD reaching parity.

The BOE’s Bailey also commented on the disparity between inflation in the US and Europe, saying there was more demand pressure in the US.

EURUSD is slightly lower on the day and given the fundamental differences between central bankers, this suggests that EURUSD is likely to remain under further pressure (selling EUR and buying USD). GBPUSD is also significantly lower in what has been an up-and-down trading day for this pair.

On other markets at the end of the day:

• Crude oil closed near $85.32 as markets understood that Israel was planning a retaliatory strike against Iran.
• Gold prices amid a rise and fall are trading lower -$3.53 or -0.14% at $2,379.
• Bitcoin fell to a low of $61,654, but rebounded towards the middle of the trading range at $62,949 currently.

In the US equity market, major indices were mixed, with the Dow Industrial Average rising on the back of a 6% gain in Unitedhealth (after earnings). Both the S&P and NASDAQ fell slightly:

• Dow Industrial Average +0.17%
• S&P Index, -0.21%
• NASDAQ Index, -0.12%

European indices were hit hard today and closed down -1.40% to -1.82%:

• German DAX, -144%
• CAC France, -1.40%
• British FTSE 100, -1.82%
• Spanish ibex, -1.50%
• Italian FTSE MIB -1.65%

US yields have risen as markets continue to adjust to potential and the Fed is on hold for 2024:

• 2 years 4.989%, +5.1 basis points
• 5 years 4.703%, +5.8 basis points
• 10 years 4.667%, +3.9 basis points
• 30 years 4.764%, +2.5 basis points