European markets are trading mostly higher on Thursday as investors have shrugged off a less dovish Federal Reserve’s tone, in part due to strong corporate earnings. Yesterday, the Fed cut its main interest rate for the first time since 2008, citing signs of a global slowdown, lingering trade tensions and persistent low inflation. Meanwhile, Powell suggested the cut was a “mid-cycle adjustment to policy” rather than the start of an aggressive monetary easing cycle. This statement sent risky assets lower across the board and fueled a widespread dollar rally.
In the U.K., the Bank of England voted unanimously to hold interest rates steady at 0.75% and cut its growth forecast due to increased Brexit worries and a slowing global economy. The central bank didn’t mention a plan to cut interest rates but lowered its growth forecast to 1.3% for 2019 and 2020, down from 1.5% and 1.6% respectively.
Meanwhile, earnings remain in focus, with Societe Generale reported a second-quarter net income of 1.16 billion, surpassing market expectations. The bank’s stock rose 4% after the report. On the other hand, Royal Dutch Shell’s second quarter profits slumped to a 30-month low, sending the company’s shares nearly 5% lower. British bank Barclays reported a second-quarter net profit of $1.25 billion, beating expectations.
Against this backdrop, the UK’s FTSE 100 sheds 0.22 per cent to 7569, Italy’s FTSE MIB adds 0.12 per cent to 21,422, France’s CAC 40 gains 0.54 per cent to 5,548, while German DAX 30 gains 0.33 per cent to 12,229. US stock index futures turned into a recovery mode after a dip on hawkish comments from the Federal Reserve on Wednesday.
The dollar continues to outperform its rivals on Thursday as traders are still digesting the FOMC message which was not as soft as many expected. As such, EURUSD dripped to more that two-year lows around 1.1026 and remains around the lower end of the bearish channel. Eurozone manufacturing PMI came in a bit higher than expected while in Germany, the index disappointed once again, which fueled concerns over the state of the largest European economy and added to the bearish pressure around the common currency.
Meanwhile, the pound slightly trimmed losses after the Bank of England monetary policy decision. In his statement, Carney said that sterling would likely fall after a no-deal Brexit. He also noted that headline inflation likely to fall half a percentage point below target in coming months due to lower energy bills, while no-deal preparation by government and business cannot eliminate need for fundamental economic adjustments that will be needed after no-deal. GBPUSD dipped to 1.2084 and then recovered marginally above 1.21 but remains under pressure.
In the oil market, Brent crude is trading nearly unchanged after a limited sell-off on Wednesday following FOMC decision. The current sentiment in the market looks neutral, with upside potential is limited despite the EIA reported that the US crude oil stockpiles declined another 8.5 million barrels last week. Brent lacks the bullish impetus in the short term and will likely remain marginally above $64 while traders await fresh drivers.
Nathan Lambert, Head of Global FX Analytical Department