The Federal Open Market Committee (FOMC) concludes its September policy meeting today, with the Fed widely expected to announce another rate cut later this evening. In what would be the Fed’s second cut in as many months, economists forecast the bank will lower interest rates from 2.25 percent to 2 percent. However with the cut largely priced in already, the direction of the US dollar following the announcement is likely to be determined by the bank’s forward guidance and the chances of further monetary easing.
Which way the Fed might go from here is far less clear cut.
Global headwinds appear to be growing, with recent economic data stoking concerns for a looming US recession within the next 18-months.
Fed Chair Jerome Powell has previously said the Federal Reserve will continue to ‘act as appropriate’ in order to support US economic growth, which hints at the possibility of future cuts.
However other indicators, such as retail sales, inflation and employment, all remain fairly robust so we could see the Fed maintain a more neutral outlook. While this would benefit the US dollar, President Donald Trump would be less impressed as he continues to urge for sharper cuts.
Meanwhile, the pound struggled to hold its ground today after August’s UK consumer price index came in below expectations, showing a slowdown from 2.1 percent to just 1.7 percent, falling short of the 1.9 percent price growth forecast.
Yael Selfin, Chief Economist at KPMG UK warns this could be another indicator that UK growth is slowing: “The falling inflation rate could be an early signal of a cooling economy, in line with what we have seen in the US and the euro area.”
Still to come this week, tomorrow’s UK retail sales figures could dent the appeal of Sterling if sales growth stagnated last month as economists forecast.
This will be followed by the BoE’s latest rate decision in which the bank is widely expected to leave rates on hold, but prompt some potential pound movement with its latest take on Brexit.