October Rate Cut Risks

The September FOMC meeting was a disappointing meeting for USD bears. The Fed reduced its headline rate by a further 25 basis points though USD downside was offset by news that three members dissented against the cut. Additionally, the dot plot forecasts failed to show a clear path forward. As such, the market reduced its expectations for further Fed easing on the back of the meeting.

However, it is worth noting that in the press conference following the meeting, Fed chair Powell noted that the bank would “make decisions meeting by meeting”. Essentially, Powell was saying that in line with the Fed’s data-dependent stance, it would judge the need for a rate adjustment independently at each meeting. As such, despite the initial scepticism over the likelihood of further cuts, there is still a case for a forthcoming US rate cut. The market is currently projecting one further rate cut this year in December, however, recent developments make an increasingly strong case for an October cut.

On the data front, conditions have deteriorated since the September FOMC. The September manufacturing reading, which showed the sector remaining in contractionary territory for a second consecutive month, hit decade lows at just 47.8. Worryingly, the 3 months average for the ISM manufacturing reading is now at the same level as it has been with each 3-month average leading up to each recession of the last fifty years. Alongside this, forward-looking indicators such as the inventory-to-sales ratio suggest that supply is now outstripping demand which means that the manufacturing index is likely to remain in negative territory going forward. This view is in line with the new orders component of the manufacturing index having also fallen.

While the drop in manufacturing is worrying, more concerning is the weakness in the non-manufacturing index, which accounts for the lion’s share of the US economy. Although the non-manufacturing reading is not yet in contractionary territory it is moving lower and its own three-month average is now in line with the three-month average ahead of the last two recessions.

Trade Negotiations Still Key

A key determinant of whether the Fed will end up cutting rates in October will likely be the outcome of the upcoming US / Sino trade meetings this week. The two sides are due to meet for meetings beginning on October 10th and although recently the market has been optimistic over the prospect of an interim deal being done, recent reports have raised concerns. China is reportedly due to reduce the scope of areas for negotiation and has reiterated its message that it will only agree a deal if the US removes all tariffs. Meanwhile, Trump has recently emphasised his message that the US will only do a deal if it is 100% right for the US. Given the divisions which still remain over key issues, the risks of talks ending without a deal remain high and should talks fail once again, this could lead the Fed to intervene in the economy once again this month. However, if talks can produce a positive outcome, even in the short term, this would likely see the Fed opting to remain in a wait and see mode until December when it would have a better view on how trade talks will play out.

Technical & Trade Views

AUDUSD (Bearish, below .6776)

AUDUSD From a technical and trading perspective. AUDUSD remains near the yearly S1 at .6657 where we have plenty of big lows offering support also. With longer term VWAP still negative, risk of further losses remains and I will be watching to see if we break down below the S1 level looking to position short on a retest. It is worth noting have seen clear bullish divergence in momentum studies indicating risk of a reversal higher. If we break above the monthly pivot at .6776 I will reassess.

Will The Fed Cut Rates In October?

Please note that this material is provided for informational purposes only and should not be considered as investment advice. The views discussed in the above article are those of our analysts and are not shared by Tickmill. Trading in the financial markets is very risky.

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