Markets indifferent to FOMC minutes, Brexit extended until Halloween

Summary:

• FOMC minutes did not offer too much in terms of where the Fed could go with rates from here
• A so-called flexible extension of Brexit has been agreed between the UK and the EU, the deadline is set on October 31
• UK likely to take part in European elections in May, otherwise it will leave the block without a deal on June 1

Rates higher, rates lower

The notion expressed by Federal Reserve officials during their latest meeting in March suggests that rates could be either higher or lower depending on how a mix of risks will play out, such conclusions can be drawn from the FOMC minutes released on Wednesday. On top of that, a majority of members agreed that patience was needed seeing rates on hold through this year. When citing uncertainties to the economic outlook they pointed to Brexit and a trade war with China, but they signalled that “risks of the adverse outlook had fallen”. Some officials also voiced their concerns with regard to the yield curve flatness (they meant it had happened quite quickly). So, it looks like the Fed is comfortable with the current level of interest rates as they may think they have already reached a neutral level. What does it mean for markets? We reckon that the Fed is very unlikely to hike rates this year even if the economic backdrop improves during the second half of this year. If this is the case, the Fed might find it hard to lift rates next year as economic growth momentum is expected to deflate further. As a result, the Fed may have already got its neutral level of rates from where rate cuts are much more likely than rate rises. Our view is also underpinned by weak responsiveness of price growth to wage growth, something Fed officials contemplated last month.

The EURUSD has recently bounced off the support localized slightly below 1.12 and is heading toward 1.14 where more sellers may lurk. Source: xStation5

Brexit on Halloween

The UK and the EU agreed on Wednesday to a so-called flexible extension of Brexit until October 31 with a possibility to leave the block earlier once the UK Parliament is able to ratify the May’s agreement. Therefore, the most likely scenario is the UK will take part in European elections in May. If it refused to participate in the elections, then it would crash out of the EU without a deal on June 1 - this scenario sounds very unlikely. During his post-meeting speech European Council President Donald Tusk said “Please do not waste this time.” On top of that the European Council reiterated its stance that there could be no reopening of the withdrawal agreement negotiations meaning that the UK will leave the block under circumstances which have been already worked out, or it cancels Brexit altogether. PM Theresa May said that “do not pretend the next few weeks will be easy, or there is a simple way to break the deadlock in Parliament. But we have a duty as politicians to find a way to fulfil the democratic decision of the referendum, deliver Brexit and move our country forward.” Thus, as for now it looks like a postponement of a hard Brexit possibility, and with no any idea to solve the impasse in the UK Parliament one may still take such a possibility into account. Therefore, the British currency barely responded to the announcement overnight trading around 1.31. Looking forward, while the UK Parliament will break up for its Easter break on Thursday until April 23, cross-party talks between Conservatives and the Labour Party are expected to continue.

The pound is comfortably trading within the consolidation between 1.30 and 1.33. This range-trading is likely to continue until a major breakthrough in Brexit occurs. Source: xStation5

In the other news:

• China’s March CPI grew 2.3% and PPI rose 0.4% in annual terms, both readings as expected

• Chinese equities trade lower this morning with the Shanghai Composite falling 1.5% and the Hang Seng (CHNComp) declining 1.1%