FOMC Preview

Six months ago, almost to the day, the Federal Reserve raised the target range of its benchmark interest rate to 2.25-2.50%. It was the seventh time the Fed had raised rates since late 2015, and the message that accompanied was at least two more rate hikes would follow in 2019 to complete the tightening cycle.

Six months ago, almost to the day, the Federal Reserve raised the target range of its benchmark interest rate to 2.25-2.50%. It was the seventh time the Fed had raised rates since late 2015, and the message that accompanied was at least two more rate hikes would follow in 2019 to complete the tightening cycle.

With a nervous eye on the U.S.- China trade war as well as the heightened equity market volatility that marked the last quarter of 2018, the interest rate market took an opposing view. By the second week of 2019, it had removed all rate hikes for 2019 and had priced in 15bps of interest rate cuts for 2020.

Currently, the U.S. interest rate market has 96bp or almost four rate cuts priced between now and December 2020, vindicating those that took an opposing view to the Fed at the start of 2019.

While a rate cut is possible this week, the first cut is expected to come at the Fed meeting on the 31st of July, just a few short days after the G20 where it is expected Presidents Trump and Xi will meet to discuss differences on trade. President Trump is on record as saying that if he and President Xi do not meet at the G20, the U.S. will proceed to impose tariffs of 25% on the remaining $300bn of Chinese imports.

This week’s meeting is therefore likely to be used to open the door for a rate cut in July pending the outcome of the G20. To achieve this, the June statement is likely to include the following:

  • Keep the federal funds rate target range unchanged at 2.25-2.50%.
  • Open the door to a rate cut in July by highlighting the threat to global growth from the escalation in U.S.- China trade tensions.
  • Mention the slowing growth rate, low inflation and the recent slowing of job growth.
  • Emphasize that the Fed is ready to act "as appropriate" should there be "material downside risk" to the outlook and to ensure the current expansion remains on track.

In summary, this week’s FOMC meeting is likely to be used as a stepping stone for a possible rate cut in July. A move that would validate the long-held view that the bond market remains the smartest of the capital markets.

Source Tradingview. The figures stated are as of the 18th of June 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

Disclaimer

TECH-FX TRADING PTY LTD (ACN 617 797 645) is an Authorised Representative (001255203) of JB Alpha Ltd (ABN 76 131 376 415) which holds an Australian Financial Services Licence (AFSL no. 327075)

Trading foreign exchange, futures and CFDs on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange, futures or CFDs you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss in excess of your deposited funds and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange, futures and CFD trading, and seek advice from an independent financial advisor if you have any doubts. It is important to note that past performance is not a reliable indicator of future performance.

Any advice provided is general advice only. It is important to note that:

  • The advice has been prepared without taking into account the client’s objectives, financial situation or needs.
  • The client should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation or needs, before following the advice.
  • If the advice relates to the acquisition or possible acquisition of a particular financial product, the client should obtain a copy of, and consider, the PDS for that product before making any decision.

Related Articles

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.