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Timothy Fox - Head of Research & Chief Economist
Mohammed Al Tajir - Manager, FX Analytics and Product Development
Published Date: 27 October 2019
Some of the sting appears to be going out of the US-China trade talks, with reports that a postponement of tariffs set to be imposed on China in December is potentially in play. China has said that parts of the text for the first phase of a trade deal with the US are ‘basically completed’ which is raising hopes that the two sides will be able sign this first phase at a 16-17th November Asia-Pacific Economic Cooperation summit in Chile, at which Presidents Trump and Xi are scheduled to attend. Both sides certainly seem keen to play up the progress being made, probably for domestic political reasons in the US case as Trump faces impeachment proceedings and following a number of foreign policy blunders. China for its part has to contend with a sharply slowing economy with real GDP growth in Q3 posting just 6.0%, the weakest expansion in some thirty years. Thus it is probably in both parties’ interests to accentuate the positive for the time being, which should also help market sentiment to remain relatively favorable.
Into this relatively benign picture will come the Federal Reserve’s monetary policy meeting this week, which carries the potential to either perpetuate the current relative calmness in markets or to disturb it. Market confidence about a third 25bps rate cut this year appears to be running high, with futures prices showing a 90.4% chance of move at the October 29-30 policy meeting, to a 1.50% to 1.75% band and 1.625% midpoint.
Given that the Fed talked of its last two moves as mid-cycle adjustments, it will be harder to portray back to back cuts in the same way, especially as the external threats the Fed is primarily concerned about from trade and Brexit appear to be abating. Economic data which took a dive at the beginning of this month has also subsequently steadied a little. If they do indeed go ahead and meet market expectations with another cut the important thing will be to try and communicate a readiness to pause this rate cutting cycle at some point in the future. The policy statement is likely to reiterate that the Fed will continue to "act as appropriate" but it also needs to delineate the circumstances in which the Fed will resist market pressure for further cuts.
Easier than doing this might be to ignore market pressure this time around and hold rates steady, demonstrating that it will not be boxed into a corner. To do this would risk seeing markets tumble and the current positive sentiment unravel however. The markets probably rightly think that the Fed is unlikely to stand in the way of a cut this week and risk renewed volatility, but the price of this may well be a harder day of reckoning at some point down the road.
Source: Emirates NBD Research, Bloomberg
FX Week - 15th December 2019
Risk appetite boosted
The week ends on an optimistic tone
FX Week: Volatility continues