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Fed interest cut certain while UK awaits new PM

As Britain is days away from a new prime minister, Boris Johnson's opponents are looking for ways to avoid a no-deal Brexit, in the Lib Dem camp.

Centtrip: Boris sets out Tory stall, while Trump strikes tentative deal

Federal Reserve Chair Jerome Powell and his colleagues look set to drop the interest rate by 25 basis points at its next policy meeting at the end of this month, ending deliberations about a bigger cut in what will be the Federal Bank’s first in over a decade. Officials are not prepared for a bolder action now, according to the officials’ recent public statements and interviews, as they weigh concerns over a slowdown in global growth, increasing trade uncertainty and a pullback in inflation.

Market expectations of a half point cut increased on last Thursday, 18 July after New York Fed President John Williams indicated that a more aggressive and pre-emptive action is warranted when the economy is weakening and interest rates are already low. US President Donald Trump, who has been calling for multiple rate cuts for a while now, supported the move. In a series of tweets addressed to the Fed last Friday, 19 July, he said, “Don’t blow it!”

However, the US central bank was quick to downplay Williams’ comments, stating, “This was an academic speech on 20 years of research. It was not about potential policy actions at the upcoming FOMC [Federal Open Market Committee] meeting.” The consensus from the Fed seems to support a series of smaller, more accommodating cuts to the economy that many feel does not require any aggressive stimulus.

In Europe, there was further speculation that the European Central Bank (ECB) could cut rates at its next policy meeting this week, as fears around the worsening economic and political situation resurfaced. Money markets are pricing in a drop of 10 basis points at 60 per cent. Brexit uncertainties, political tensions emanating from the Italian coalition and the prospect of resuming the bond buying programme this year are cited as catalysts for the policy change.

In the UK, the Conservative Party’s vote on the next prime minister closes tonight, with the result coming as early as tomorrow. Chancellor Philip Hammond stated over the weekend that he would resign if Boris Johnson emerges as victor, the fact that has weighed heavily on Sterling, which sits just above 1.25 against the Dollar.

In Asia, the focus remains firmly on the US-Chinese trade war. A report published over the weekend by news agency Xinhua stated that some local firms were looking to purchase US farm products, a move that shows potential progress in talks.

Today is light on data, with the focus this week on the UK PM imminent announcement and the ECB’s policy meeting on Thursday.

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