Headlines

* Fed holds rates steady, signal first rate cut is nearer

* BoJ Governor Ueda says does not have 0.5% policy rate in mind as ceiling

* S%P 500, Nasdaq rise on chip sector rally, upcoming policy easing

* Meta tops Q2 views amid ad revenue strength, stock up over 5% after hours

FX: USD sold off after the FOMC meeting. It was initially seen as modestly underwhelming as there was no explicit nod to a September rate cut. Tweaks to the language in the statement marginally hinted at greater comfort and policy easing. But Powell also provided a more dovish spin while emphasising that data needs to back this up. Highlighting the cooling labour market was an important shift to a more balanced tone. Initial support sits at 103.65.

EUR enjoyed small gains but still hovers around its 200-day SMA. Hotter than expected CPI data only slightly moved the odds of a September rate cut. The major will be driven by the ISM and NFP data for the rest of the week.

GBP had a relatively quiet day as attention turns to today’s BoE meeting which is on a knife edge. There’s around a 60% chance of a 25bps rate cut.

USD/JPY outperformed significantly with the major down 1.83% on the day, its worst since May 1^st. The BoJ followed through with the leaked stories and hiked rates to 0.25%. The bond buying amount was disappointing, but Governor Ueda made up for it in his more hawkish press conference. He highlighted that the bank does not have a 0.5% policy rate as a ceiling, while pointing out that Japanese rates are far below the uncertain levels of the neutral rate. Initial support we have is 148.68 with the 152 level now major resistance again.

AUD touched 0.6479 and levels last seen in April before finishing very modestly higher on the day after the Fed meeting. Headline CPI matched forecasts but crucially, the core print slowed to a two-year low at 3.9%. Rate hike bets were priced out. USD/CAD tumbled to 1.38 after making multi-month highs at 1.3864 on Tuesday.

US Stocks: US markets were strong, bolstered by a chip rally and hopes of incoming Fed rate cuts. The benchmark S&P 500 closed 1.6% higher at 5,522. The tech-dominated Nasdaq 100 finished up by 3.01% at 19,362. The Dow Jones settled 0.2% up at 40,843. A myriad of positive semi-conductor news helped tech. AMD issued a solid report and raised forecasts of chip sales, there were US exemptions for ASML and Tokyo Electron in its new sanctions on exports to Chinese chipmaker, and Nvidia (+13%) was added to Morgan Stanley’s top pick list. Meta shares popped higher in the after market as it published an upbeat outlook with a revenue and earnings beat. This helped offset AI spending that will surge in 2025.

Asian stock futures are green. Asian stocks were positive as markets digested data and the BoJ decision. The ASX 200 moved north led by energy and tech strength. The Nikkei 225 fell on the BoJ rate hike though the bond buying plans were less aggressive. The Hang Seng and the Shanghai Composite gained on better China MPI data.

Gold jumped over 1.5% adding to the prior day’s upside breakout. A safe haven bid on Middle East tensions was helped by plunging Treasury yields. The 10-year is very close to 4%.

Day Ahead – Bank of England Meeting

The Bank of England will be the third of the week’s biggest central banks to weigh in on Thursday. This meeting will include updated projections and a press conference following the release of the statement. Markets are pricing in around 15bps, so moving higher than the 50:50 coin flip from last week. Bloomberg consensus is more convinced that a cut will be delivered with 75% of forecasters expecting a cut. The lack of recent communication from BoE officials nevertheless maintains significant uncertainty into the call.

We know the last meeting in June to hold rates was “finely balanced”. That means the decision of four or five MPC officials stuck in the middle of the hawks and doves, including Governor Bailey, will be key. The close call is further amplified by new member Lombardelli joining the committee for her first meeting. Recent data has overall been stronger than expected across both CPI, activity and partly labour markets which continue to gradually loosen. Sticky services inflation and wage growth could be crucial for rate setters.

Chart of the Day – Reslient GBP/USD waryy of cuts

Cable topped out at one-year highs at 1.3044 in mid-July driven by softer US rates and French political issues. Interestingly, on a trade-weighted basis, sterling had earlier this month rallied to levels last seen on the day of the Brexit vote in June 2016. But the BoE meeting and the possible start of an easing cycle could present a headwind to the resurgent pound.

The flip side and no cut along with neutral language and data dependency would underpin suport for GBP. Markets are pricing 50bps for the remainder of the year with the first 25bp cut fully priced by November. Support in cable resides at 1.2787 and 1.2757 with resistance at 1.2865 and 1.2893.