Four countries eased their monetary policies this month, including Chile that lowered their interest rate from 2.50% to 2%, Russia lowered their interest rate from 7.25 to 7%, Turkey lowered the One-Week Repo Rate as well as Overnight lending and borrowing and the ECB decreased the Deposit Facility Rate to -0.5% from -0.40% as well as re-started the QE program starting from November 1st. This shows us that banks from across the globe are forced to lower their interest rate to sustain their economies. The RBA left their interest rate unchanged at 1% early in September, but the RBA meeting minutes, released yesterday, suggest that they are open to further easing due to concerns about the global slowdown in trade.
Today, we are awaiting the anticipated release of the FEDs decision on the interest rate at 18:00 GMT. The forecast is a quarter drop from 2.25% to 2%. The last rate cut from 2.50% to 2.25% was on July 31st – the first rate cut in a decade. At that time, the FED was optimistic and stated that further easing would not be necessary. And actually, at this time the stance may not have changed by much. FOMC policymakers are divided in opinion. As we mentioned in our article yesterday, dovish St. Louis Fed President James Bullard and Minneapolis Fed President Neel Kashkari are expected to argue in favor of monetary easing while opposition may come from Cleveland Fed President Loretta Mester, who was against the rate cut in July and Philadelphia Fed President Patrick Harker who agreed to the rate cut, though reluctantly and stated he wants “to see how things play out”.
US macroeconomic indicators have been mixed since the last meeting in July. Retail Sales decreased and Non-Farm payrolls also dipped down well below the previous result and the forecasted increase. Manufacturing PMI saw a decline and consumer sentiment worsened. On the other hand, Services PMI saw growth and Average Hourly Earnings rose at 0.4% which is the best reading for the past 6 months. According to the Beige book, businesses remain cautious because of trade tensions but for the time being remain optimistic. The market has fully priced in a quarter rate cut today, and even if it does happen the main focus will be on the FED’s statement, whether it be optimistic of the future or dovish in the near-term.
Later tonight, at 21:00 GMT there will be the decision of the Brazil Central Bank. They are also forecasted to lower the interest rate by 50bp from 6% to 5.50%. Tomorrow, the BoJ will let us know their interest rate decision at 03:00 GMT followed by the BoE at 11:00.
As we mentioned, the possibility of a rate cut today is almost guaranteed, especially given the latest developments on the deterioration of the plumbing in the U.S. financial system. On Monday and Tuesday, the cash available to banks for their short-term financial needs reached very low limits. This caused the interest rate on overnight loans skyrocket. The FED had no choice but to make an emergency injection of more than $50 billion into the financial system of the US on Tuesday to prevent the rates from climbing even higher.
We now need to see how Fed Chair Jerome Powell feels about the future. If he is to present himself with optimism, pairs like USDJPY will see growth. But if the statement is dovish and/or the rate cut is more than 0.25% USDJPY will move to the downside.
On a DTF for USDJPY we see a double bottom pattern that initiated bullish reversal after creating the lowest low since 2016 at 104.446.
On the 4HTF, we see that the pair closed the gap created on Monday, following the oil attack in Saudi Arabia. The pair has been in a flat all of today, which is expected ahead of the FEDs decision. If the FED is hawkish, the pair’s long position targets will be at resistance levels: 108.969, 109.310 and then 109.731. A dovish FED and short position targets will be at 23.6% Fibo 107.445, then 38.2% Fibo 106.872, followed by the 50% Fibo at 106.409 and finally 61.8% Fibo 105.945. Let us not forget that there is always the possibility that the rate may be left unchanged and/or the FED may fail to give hints on further FED action and price movement will be limited.