Federal Reserve set to cut rates for third time this year

nvestors are instead turning their attention to this evening’s Federal Reserve meeting, with the market overwhelmingly expecting the central bank to cut interest rates for the third time this year. Fed fund futures are, in fact, now showing around a 95% chance of a move from the bank, suggesting that the reaction in the dollar to the announcement will be driven almost entirely by the accompanying rhetoric regarding future rate adjustments.

The performance of the dollar in recent weeks implies that the market is not expecting additional easing beyond the October meeting. We remain of the opinion that the Fed will indicate a pause in the rate cut cycle is on the way. While macroeconomic data out of the US has worsened of late, we do not believe it is of a degree that would cause policymakers to be overly concerned. The FOMC was also divided regarding the need for cuts this year at its September meeting, with the likelihood of enough members shifting from signalling no more rate cuts are needed this year to two pretty low in our view.

A more hawkish assessment from Chair Powell that downplays the need for additional moves would be a big positive for the greenback and could send it towards the 1.105 level against the euro later this evening.

Sterling rallies on news of December election

There finally appeared to be light at the end of the Brexit tunnel on Tuesday, with UK politicians agreeing to a general election on 12th December at the second time of asking.

Boris Johnson failed to get the two-thirds majority required to hold an election on Monday, although MPs overwhelmingly approved legislation on Tuesday evening that paves the way for a snap vote. This marks a rather dramatic U-turn from Labour leader Jeremy Corbyn, who instructed his party to abstain from the initial vote at the beginning of the week. While the motion still requires approval from the House of Lords, this is unlikely to be opposed.

The optimistic reaction in the pound, which briefly rallied back above the 1.29 mark against the dollar, can be attributed to the market’s view that Johnson’s Conservative Party are very well place to obtain a majority. The Tory Party are currently well ahead in the latest polls (anywhere between 13-16% according to the four most recent surveys), with implied bookmakers probabilities giving them around a 55% chance of obtaining over half the seats in the House of Commons. We believe that a Tory majority would all but ensure Johnson’s withdrawal agreement passes before the end of January deadline.