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Exchange Rates 18.07.2019 analysis

The response of the market to the strong US retail sales was negligible; traders preferred to focus on the next comments of the Fed. Therefore, on Wednesday, the dollar was only able to fix the growth of the previous session just above the level of 97.

Exchange Rates 18.07.2019 analysis

Speaking in Paris, Jerome Powell intervened in market expectations again, hinting at the risks of lowering inflation expectations, which requires a more flexible policy adjustment from officials. At the same time, the Federal Reserve persists in ignoring traditional fundamental data, showing its concern with leading indicators. After Powell's speech on Tuesday, the odds of a 50 bps rate cut increased to 31%. At the same time, the head of the Central Bank was able to convince the market that the Central Bank would be able to stimulate inflation, since the market metrics of inflationary expectations turned into growth from the end of June.

Thus, pressure on the American economy comes from trade relations with partners. Inflation expectations declined after the announcement of an increase in tariffs for Chinese goods. Powell has pointed out on this for more than once. It cannot be ruled out that the reaction of inflation expectations to the bottom was a "foresight" of the new cycle of mitigation of policy in response to the escalation of tariff tension. In this case, the Central Bank is led, as it responds to a false signal and ignores strong economic reports.

Be that as it may, it is difficult to consider a reduction in the rate of half a percent at once as a reasonable precautionary measure. The labor market and retail volume are growing quite confidently.

Next week, the ECB is expected to give a strong stimulus signal, which will reduce the risks of a further slowdown in growth abroad. This is one of the reasons for the Fed's concerns, along with the trade war. Friday's report on US GDP may contain a positive surprise, at least there are prerequisites for this. In this scenario, traders are unlikely to sell dollars.

Estimates and expectations of the world's largest banks about the Fed rate cut

The Goldman Sachs are waiting for the reduction of 25 basis points in July and another by the same amount until the end of this year. A similar opinion is shared by experts JPMorgan.

Everyone understands that the Fed is set to soften the policy in July, they write. The situation in the world remains alarming, business sentiment continues to deteriorate, and deflation signals from a slowdown in producer price pressure put pressure on corporate profits. The combination of these factors has a negative effect on the increase in capital expenditures in the world.

Representatives of Morgan Stanley and UBS predict an aggressive policy easing - immediately by 50 basis points without an additional reduction before the end of the year. In their opinion, the current situation requires decisive action. Over the past 12 months, the global economy has noticeably slowed down, aided by trade conflicts. US GDP also risks slowing growth.

Citigroup, on the other hand, forecasts a quarter percent decline in July and the same in September. According to them, a decrease of 25 basis points is a kind of compromise on the committee. Although, it is possible that some officials will vote to reduce by 50 basis points.

There is a consensus in Bank of America and Barclays. Jerome Powell made it clear that at the next meeting, the rate will be reduced regardless of statistics, they comment. The cost of lending will decline by at least 0.25% in July and another 0.5% by the end of the year.

Performed by A Zotova,
Analytical expert
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