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Fed cuts rates, sheds no light on what is next

While Brexit talks are not looking promising and after the Fed cuts rates, markets will focus on the BoE's interest rate decision today.

Centtrip: US FOMC signals further rate cut

The Federal Reserve cut interest rates by 0.25 per cent to 2.00 per cent last night, in line with broad expectations. Seven out of 10 Fed members voted in favour of the cut, citing “implications of global developments for the economic outlook” as the primary reason.

The accompanying statement claimed the US economy has been expanding at a moderate pace amid a strong labour market and rising household spending. However, due to weak investment and to ward off the effects of the unfavourable global economic outlook, action was needed.

Despite suggesting the US prospects were “favourable”, Fed Chair Jerome Powell said the “insurance” rate cut was necessary and signalled that further cuts were possible.

The Fed’s hawkish move provided broad support to the Dollar against major currencies, apart from the Japanese Yen. The greenback regained ground against the Pound and the Euro, with the latter two dropping overnight to 1.2447 and 1.1014, respectively.

However, according to some economists, the gloom around the global economy is still there amid uncertainty that is pushing investors towards the Yen. The Japanese currency had its sharpest daily surge in almost one month, having hit 107.79 against the Dollar overnight.

Futures markets are pricing in one more interest rate cut before the end of the year, but in the absence of a preset course from the Fed, the Dollar is likely to continue gaining strength in the short term.

In the UK, the Consumer Price Index (CPI) showed the inflation rate declined to 1.7 per cent in August –down from the previous month’s reading of 2.1 per cent. The core rate dropped to 1.5 per cent, its lowest reading since the end of 2016.

Markets will today focus on the Bank of England’s meeting. An interest rate adjustment is unlikely, but there is a view that the BoE will take a dovish stance on the economy and future monetary policy.

The latest BoE report comes at a crucial time for the UK, which is now six weeks away from the 31 October Brexit deadline. European Commission President Jean-Claude Juncker has warned of the risks of a no-deal Brexit as the talks are reaching a boiling point.

So far, the UK was facing a political impasse which hurt Sterling, capping it below 1.25 against the Dollar.

Today, the UK will release the latest retail sales data, followed by the BoE’s interest rate decision and monetary policy summary at 12:00 (BST). US Philadelphia Fed Manufacturing Index data will round off the day at 13:30.

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