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All eyes on the Fed, but what sort of cut?

It is an incredibly important week for markets with the big focus on the monetary policy meeting of the Federal Reserve. A rate cut is guaranteed, but what will forward guidance bring? We look at the impact on forex, equities and commodities.

FOMC and US flag

The Federal Reserve has been tightening monetary policy since December 2015. However, there is overwhelming expectation that the tightening cycle will end with a rate cut on Wednesday. However, the issue market has been grappling over for the past few weeks, is whether it is one and done for the Fed, or whether this is set to be the first of a series of cuts. It is our expectation that the Fed will cut by 25 basis points on Wednesday. A cut and then wait and see. Looking at the US economy, the run rate of economic growth in 2019 is around 2% to 2.5%. Inflation on core PCE is running below the 2% target, but recently inflation expectations have picked up notably. Earnings growth remains solid at 3.1% so real wage growth is still well over a percent. Consumer confidence (an important indicator for an economy c. 70% household consumption) also remains solid. However, the slowdown in business fixed investment is a concern for the FOMC in light of the ongoing trade dispute, something Fed chair Powell was keen to point out in his recent Congressional testimony. Subsequently we expect this will be an insurance cut, with a view to further cuts if the trade dispute deteriorates in the coming months. Watch for the number of dissents on the FOMC on this rate cut too. Fed funds futures are pricing in at least two cuts by December and three cuts within the next 12 months, something we think is too dovish and needs to be rolled back. This should help to maintain the dollar as the main outperforming major currency (even if Dollar Index may have already seen its highs for 2019).

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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.