Overview
The US Federal Reserve’s next week policy meeting will most likely bring about a second cut in interest rates this year. The cut largely expected to be again at 25 basis points- although some market-watchers put their bets on 50 basis points particularly after what seems to be a global rate cut frenzy from Asia to Europe.
Chairman Jerome Powell’s reiteration, verified by data, that the US is in good shape is noted by all sides but external risk factors stemming from the trade war with China and commercial competition with other economies warrant a cut. Although Powell and others have resisted calling it so, it could become the confirmation of a cycle, after the July cut that lowered the rates to 2.25%.
Fed’s apparent reluctance to go along with perceived threats is counterbalanced by President Donald Trump’s insistence that it should slash the rates, slash them fast and big — down to zero or below figures. Trump’s thinking, given his tantrums against Powell and continued attacks, seems to be reasoned with his fear that US producers facing the obstacle of an unusually strong dollar will suffer from the trade war with China ahead of next year’s presidential elections.
Across the pond, the European Central Bank’s (ECB) decision on Thursday to lower key interest rates on the deposit facility by 10 basis points to -0.50% has attracted criticism from national central banks, particularly from the German and Dutch monetary chiefs.
The additional decision to relaunch a stimulus program to support the Eurozone’s slowing economy came under fire and created controversy as Bundesbank’s Jens Weidmann called it ‘going overboard the ECB’s target.’ The stimulus was the net purchases under the bank’s asset purchase program (APP) at a monthly pace of €20 billion from November 1 on.
Weidmann, strongly criticized the accommodative policy, stating that the ECB left the framework of the stimulus package, adding that he hoped the increase in interest rates is not delayed for too long.
ECB President Mario Draghi had stated that the Eurozone economy was not facing a recession but the bank’s course for stimulus unnerved some, like Weidmann.
For the euro and pairs involving it, the German ZEW Economic Sentiment report will be watched.
In the UK, the Brexit saga goes on as the Parliament remains prorogued. PM Johnson is under pressure to abide by the law and go ask the EU for yet another delay to the Brexit date. He continues to resist and Home Secretary Sajid Javid said Johnson will not be asking the EU Commission President Jean Claude Juncker when the two meet in Brussels on Monday. No breakthrough is anticipated in the Brexit process as both sides and Ireland increasingly signals that a no-deal Brexit might occur.
The Bank of England on Thursday is set to gather for its rate decision. But no change is expected in the BoE’s 0.75% rate.
In Japan, the Bank of Japan’s (BoJ) monetary policy statement from its last meeting is due for release on Wednesday.
The exports and trade balance data on Tuesday will be closely watched. The exports in August are expected to have fallen by 10.9%, continuing a seven-month-long trend demonstrating the vulnerable side of the export-reliant Japanese economy. Improvements in the US-Chinese trade relations, that Japan is very much tied to, have pumped some cautious hope but all sides are awaiting next month’s negotiations.
Although the last week ECB decision to cut interest rates by 10 basis points initially created a negative impact on the euro, the move was short-cut when expectations for the number of net asset purchases were not met. The most important scheduled development of the week is the US Fed’s Wednesday interest rate decision that is widely expected to deliver a 25 basis point cut, with some others anticipating the cut at 50 basis points. As the downward trend continues in light of the current developments, volatility above the 1.1100 level may lead to a rise in the pair price. 1.1170 region may then be targeted if the prices exceed the 1.1100 level. 1.1030 and 1.0970 levels will be followed as supports in a drawdown.
In Britain, as the Parliament tries to prevent a no-deal Brexit, the sterling experienced a recovered on the slightly rising chances of a deal. Remarks suggesting that the Fed’s interest rate cut may remain below market expectations caused an upward movement in the pair. The current situation shows that 1.2500 level remains important in terms of resistance, if the rise continues above there we might see a strong trend towards the 1.2600 level. 1.2340 and 1.2200 levels will be support lines in the case of possible withdrawals.
Although the quarterly growth figures from Japan last week met the market expectations at 1.3 percent, it was well below the figure of 1.8 percent from the same period last year. On the other hand, mutual goodwill gestures between the US and China before the October trade negotiations increased risk appetite and led to the depreciation of the Japanese Yen as a safe-haven. The current uptrend faces resistance at the 108.00 regions. If it is surpassed 108.55 and 109.40 will be followed as resistance. The 107.50 and 106.80 levels will continue to be followed as support in the case of possible withdrawals.
Inflation figures are expected from Canada during the week along with the US Fed interest rate decision. which is expected in the US. An interest rate cut of 25 basis points is expected after the Fed Chair J. Powell’s ongoing hawkish stance that reduced chances for a 50-point cut. While the selling pressure in the pair remains limited, the 1.3280 and 1.3370 levels will be monitored for resistance in the event of a continuation to the current uptrend. We will follow the 1.3200 and 1.3140 levels for support in the case of possible withdrawals.
