Fundamental Comment

Economic Week: Fed poised to cut rates for the first time in a decade

Fed poised to cut rates for the first time in a decade

After many central banks have either cut interest rates or launched economic stimulus programs, financial markets will be on track with the Federal Reserve's interest rate decision this week to see if US policymakers will cut the borrowing cost for the first time in a decade.

The Bank of Japan and the Bank of England will also determine the course of monetary policy in light of the challenges facing the world's major economies.

Perhaps the most notable economic reports this week are the Purchasing Managers’ Index (PMI) coming out from a number of major economies.

It is important to note that the manufacturing and service PMI from the Chinese economy are expected to be of paramount importance, given the negative impact of the trade dispute between the U.S. and China. 

Dollar’s direction will depend on Fed’s rate decision

The Federal Reserve will meet this week to set the interest rate and monetary policy path in accordance with the latest developments in the US economy. Federal Committee members are expected to vote for a rate cut to 2.25 percent from the current 2.50 percent.

The recent decline in global growth and the possible negative impact of the trade war with China could be sufficient reasons to prompt the Fed to cut interest rates.

In the event of an interest rate cut more than expectations or the Fed preparation of markets with further interest rate cuts in the future, the dollar will be negatively affected.

If the Federal Reserve slashed interest rates in line with expectations, the impact of the dollar may be limited due to market pricing to the rate cut several weeks ago.

In terms of economic data, the non-farm payrolls report may indicate that US employers created 160,000 jobs in July, while the unemployment rate fell to 3.6 percent from 3.7 percent, according to median forecasts.

The July PMI report will also be of interest to investors as it may give a fundamental impression of the shape of growth in the US economy at the beginning of the third quarter.

Pound looks for support from the BOE

The British pound is still trying to rebound but is unable to do so amid concerns about the UK exit from the EU, especially after Boris Johnson won the post of prime minister in Britain.

Investors should keep their eyes open this week, as the Bank of England will decide on interest rates and publish its latest economic outlook.

The BOE will release its quarterly inflation report, which will include the latest inflation and growth forecasts for the UK economy. Based on the central bank's assessment, policymakers may decide to keep the benchmark borrowing cost at 0.75 percent.

Thursday's events are likely to affect Sterling's movement, as the BOE will set interest rates and release the inflation report and the minutes of the monetary policy meeting, as well as the press conference of BOE Governor Mark Carney.

The UK will release the manufacturing and construction PMI for July, which will give the latest update on the health of the economy at the beginning of the third quarter.

The manufacturing and construction sectors are expected to retreat, while the UK's dominant service sector data will be released next week.

Euro to follow the general market sentiment

The euro is likely to be affected by the general trend in financial markets, but it should be noted that the euro zone will release some important economic data.

Investors will focus on the final manufacturing PMI in the euro area, which could confirm a contraction in July to 46.4 from June's 47.6.

The eurozone consumer price index preliminary reading is also expected to decelerated to 1.2 percent in the year through July from the previous reading of 1.3 percent.  

Gold faces stern test

Precious-Gold fell slightly last week but continued to trade near its highest level this year, hovering above the psychological level of $1400 an ounce.

This week, the yellow metal will largely depend on the Fed's interest rate decision and its implications, as the rate cut should give some support to the yellow metal since it provides no interest to its holders.

As for crude oil, prices rose last week as geopolitical tensions around Iran remained unresolved, yet rising concerns about the slowdown in global economic growth, amid the US-China trade war, limited the gains.

The Fed’s decision is expected to affect markets in general, but further declines in US oil inventories could give some support to oil prices.

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