Good morning,

With the overnight moves of the Japanese yen, the statement from the Fed last night, the Bank of England meeting and the lead-up to England vs Wales in the Euros, the EU referendum has been knocked down the pecking order of newsworthiness.

Fed errs on the side of caution

We never thought that a rate hike would come from the Federal Reserve last night and, it didn’t. The question is not to ask what happened at the meeting but why it happened and despite not mentioning Brexit in their policy statement, global concerns are once again front and centre of the Fed’s thinking.

On the US economy the picture remains solid with the statement noting that ‘the pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up. Although the unemployment rate has declined, job gains have diminished. Growth in household sentiment has strengthened.’

The dovishness of the meeting has been expressed by a dampening of rate expectations through 2017 and 2018. I think the Fed is finally cogniscent that it overegged expectations at the beginning of the year for a full four rate increases and, while that number has now fallen to an expectation of only two further rate hikes, we still believe that the Fed is the only G10 central bank likely to raise rates this year.

Dollar slipped in the initial aftermath, and is getting eaten alive by the JPY this morning but, as we said yesterday morning, we are still confident in our call of a stronger dollar through H2 and certainly in the lead-up to the referendum.

Yen on the warpath

USDJPY is below 14.00 for the first time since August 2014 this morning as the weak dollar has been attacked by a spate of yen buying following a disappointing Bank of Japan meeting. 28% of economists surveyed by Bloomberg thought that additional stimulus would be coming down the pipe at this meeting and they’ve been disappointed. The fact that the Bank of Japan has maintained its economic assessments, following strong Q1 GDP fundamentals, is also a concern for those looking for asset purchases from Kuroda and the BOJ at next month’s meeting.

Regional equities have been knackered on the move with the Nikkei closing 3% lower and that risk aversion is spreading into Europe as we turn up at our desks.

As with all moves in yen we must remember that Japanese Fin Min Aso has said previously that a 5-yen move in either direction over 2 days would be considered one-way and lopsided backing up our belief that it is as much the speed of the move as the direction that will have the Bank of Japan looking for the big button marked ‘intervention’.

Referendum watch: 7 days to go

Today’s Bank of England meeting is not subject to ‘purdah’ rules that government departments are and therefore will be the last communication from the central bank on the referendum before the event.

I think it is obvious to say that we are expecting no change in rates, stimulus or voting record at this meeting and it would be too much to ask for any explanation of what the Bank of England may deploy as policy in the event of a Brexit.

We think that the first impetus from the Bank of England would be lower although further QE spending is more probable as well as some form of credit easing to allow funds to reach businesses and not just bank balance sheets. In the case of higher inflation – boosted by a strangled pound – we would think that the Bank of England would let inflation run hot in the event of a Brexit. Inflation hit 4.7% in 2011 as oil prices spiked and sterling remained undervalued and the Bank of England held fast in a bid for growth and liquidity. We think that they will do the same this time round.

Tonight also sees Mark Carney and George Osborne deliver their Mansion House speeches.

Friends in the polling industry tell us that 2 polls are due today; Survation and the spread better IG Index are due to release a poll at 1230, roughly about the same time that the Evening Standard Ipsos-MORI poll is expected to be published.

Have a great day.

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