Market News & Analysis


Top Story

FOMC Preview: Rate Cut Priced In, But Powell May Move Markets Regardless

In the wake of the Great Financial Crisis, Federal Reserve Chairman Ben Bernanke introduced a number of unconventional policies, including Quantitative Easing, one of the most controversial programs in the history of central banking…but the more lasting and undeniably effective policy has been ushering in the era of “communication-as-a-policy-tool.”

Over the past decade, there have been 83 FOMC meetings, with the interest rate decisions and market-implied pricing playing out in the following way:

  • In 72 meetings, the market was anticipating no interest rate change, and the Fed left rates unchanged.
  • In 9 meetings, the market was expecting a 25bps hike and the Fed delivered a 25bps hike.
  • In 2 meetings (July and September), the market was expecting a 25bps cut and the Fed delivered a 25bps cut.

In other words, the Fed hasn’t gone against the market’s pre-meeting “conventional wisdom” even once in the past decade. With traders pricing in a 96% chance of a 25bps rate cut tomorrow according to the CME’s FedWatch tool, the FOMC will almost certainly cut interest rates 25bps and run the streak to 84 consecutive meetings.

Source: City Index

Even though the immediate interest rate decision is “known” in advance, changes to the central bank’s statement and the tone of Chairman Powell’s press conference could still lead to a volatile market reaction based on how they impact the implied odds of a rate cut in December. As of writing, the CME’s FedWatch tool is showing about 15% odds of another interest rate reduction in six weeks’ time.

In terms of specifics, traders will key in on the committee’s characterization of international trade in the wake of progress between the US and China on trade, as well as any comments about the recently-slowing growth in job creation. In addition, the central bank’s decision last month featured three dissents (Bullard in favor of a 50bps cut, and George/Rosengren in favor of leaving rates steady); any further “dissension in the ranks” would introduce an element of uncertainty to the future outlook for policy.

In Powell’s testimony, the key topic to watch will be the Fed’s recent (re)introduction of asset purchases (which the central bank has definitively characterized as “NOT Quantitative Easing”). After the recent turmoil in the short-term funding market, traders will be keen for an update on the stability of this critical function of the financial system. If Powell indicates the program could expand from here or expresses pessimism about any other aspect of the economy, the US dollar could retrace last week’s gains and stock indices could surge further into record territory on the potential for further monetary support into the end of the year.

While its unlikely to be the most market-moving central bank meeting in recent memory, traders will still have plenty to digest tomorrow afternoon!

Related Analysis:

DXY and EUR/USD Retreat From Key Levels Ahead Of Fed



Disclaimer

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

GAIN Capital Singapore Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the GAIN Capital group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), GAIN Capital Singapore Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact GAIN Capital Singapore Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither GAIN Capital Singapore Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

GAIN Capital Singapore Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.

Important Notice:

Cryptocurrencies are not legal tender currency and trading of derivatives on Cryptocurrencies are currently not covered under any regulatory regime in Singapore. Consequently, investors should be aware they do not have protection under the Securities and Futures Act (Cap. 289). Please ensure that you are fully aware of the risks.