Wednesday was one of the most important days on the market. At 6 p.m. GMT the FOMC was making a decision about the interest rate. Unfortunately, this review was prepared before the decision and now we may only assume that the Fed will cut interest rates by 25 b.p. Here are three things which we think might influence Jerome Powell:
US-China trade talks failed. Of course, all sides tried to make the best of a bad bargain. Chinese Global Times stated that ‘Chinese and US negotiators had an efficient and constructive deep exchange on Wednesday. The two sides discussed increasing the purchase of US farm products and the US side agreed to create favorable conditions for it. They will hold future talks’. We think that everyone expects something more than just ‘future talks’. Lack of a trade deal makes the situation about future risks even more obscure and might trigger the decision to cut rates to support US export.
ADP Nonfarm Employment Change for July was released at +156K – slightly better than the forecast (+150K). According to ADP the worst impact in employment was made by Natural resources and mining field (-6000 people) and Information (-5000 people).
Picture 1. ADP Nonfarm
Trump attacked the Fed again. He stated that he is disappointed in the Fed and wants to see the Fed make a large rate cut.
Now, let’s speculate about possible reactions on the market. Considering the fact that the market has already absorbed the information about possible stimulation, we won’t be so sure that the US national currency will weaken. Powell has to assure the market that this monetary easing is only the first step and that future cuts are on their way. In a nutshell Fed’s chair rhetoric has to be strongly dovish.
Meanwhile, EUR/USD was falling all of Wednesday. Euro bounced back from the trend line and the target is 1.11100. If the Fed succeeds in reversing the market, we might expect that EUR/USD will break its 9-EMA and move to 1.11750. According to the options market – delta on put options with 1-week expiration and the strike price 1.1180.
Picture 2. EUR/USD. 1D TF.